What Are the Risks of Bankruptcy Alternatives?
People often recoil when they hear the word "bankruptcy." They think of the impact on their credit report and their ability to take out loans. Filing for Chapter 7 or Chapter 13 bankruptcy is seen as a last resort for Texans struggling with debt, an option to be considered only after exploring alternatives.
These alternatives, however, carry their own risks. Debt relief options like debt settlement or consolidation can have significant downsides. This article will discuss the risks of such bankruptcy alternatives. For more details or any questions about bankruptcy, speak with an experienced Texas bankruptcy attorney.
What Are the Pitfalls of Bankruptcy Alternatives?
The first step toward choosing how to deal with your debt is understanding your options and their risks. For example:
- Debt settlement: There are companies that negotiate with creditors to reach a debt settlement on behalf of the debtor. Sometimes, this entails the borrower paying the creditor a lump sum, usually for less than the original amount owed. However, debt settlement will still significantly hurt your credit score, and you may have to pay high fees. Furthermore, the amount of debt that is forgiven often becomes taxable.
- Debt consolidation: Some borrowers combine their debts into a single monthly payment, usually with a lower interest rate. However, sometimes, this means the loan term is increased so that you end up making payments for a longer time, potentially increasing your debt. In addition, many debt consolidation loans are secured against your house or car, which are at risk of being foreclosed or repossessed if you miss payments.
- Credit counseling services: A person who wants to file bankruptcy must first attend credit counseling offered by an approved non-profit organization. This usually involves working out a payment schedule to pay back your debts, which means you still must pay the amount owed and your credit score will still be impacted.
- Tapping into retirement funds: Some debtors consider tapping into their 401Ks or IRAs to pay off their debts. This can not only affect your future but can even result in tax penalties if you withdraw your retirement funds early. In addition, some retirement funds are protected during bankruptcy in Texas. IRAs up to $100,000, for example, typically cannot be touched by creditors. Using these funds to pay your debts, therefore, can squander this protection.
Which Is Better: Bankruptcy or an Alternative Option?
When deciding whether bankruptcy or an alternative option is the right choice, it is important to consider the risks of each and how they will affect your personal circumstances. The best way to determine the right path forward is to consult an attorney who is experienced in bankruptcy law and will advise you on your options.
Contact a Schertz, TX Bankruptcy Attorney
At the Law Offices of Chance M. McGhee, we dive deep into our clients’ financial situations to understand whether bankruptcy is a solution. Let us advise you on how various debt relief options can affect you and the best way to manage or discharge your debt. Schedule a free consultation with a New Braunfels, TX bankruptcy lawyer by calling 210-342-3400 now.