Financial hardship can be one of the most stressful things to go through. Uncertainty of what the future holds can have your mind swirling with questions — when will the bank call? Will I lose the house? How can I pay my debts? Should I get another mortgage?
Here we’ll go over what bankruptcy is and things you can try to pull yourself out of a financial hole without filing for bankruptcy.
What is Bankruptcy?
Bankruptcy is a legal process that allows somebody who is unable to pay their debt to absolve themselves of debt. Their creditors are then able to collect repayment in the form of assets, which often involves property or business assets. When the bankruptcy process is finished, the person or business is then forgiven of their debts and are given a “blank slate”, so to speak. Despite this, bankruptcy is generally used as a last resort, since it usually means giving up a home or liquidating business assets to get out of debt, not to mention the massive hit to credit score.
There are a few different types of bankruptcy:
- Chapter 7 bankruptcy: This is for individuals or businesses with very few or no assets. It allows them to absolve unsecured debt (meaning there’s no property or assets used as collateral for non-payment) such as credit cards or medical bills.
- Chapter 11 bankruptcy: Chapter 11 is normally used by businesses to get out of debt and restructure the company/re-strategize in order to become more profitable.
- Chapter 13 bankruptcy: Chapter 13 is used by individuals with many assets in order to restructure their debt in a way that makes it more manageable to pay off.
While there are still other bankruptcy chapters, the above three are by far the most commonly filed ones. But filing for bankruptcy can absolutely devastate your credit score — sometimes plummeting by up to 200 points. This can leave you feeling lost, since you probably will have lost your home and may not be able to access quality lines of credit any longer. Filing for bankruptcy is an absolute last resort for people in dire straits.
Before considering bankruptcy, try a few things that may help you get back on your feet.
Contact Your Creditors
If you constantly avoid your creditors, they will be less likely to help you out if you need it. Stay in touch with them and be honest about your situation. Ask them if it would be possible to restructure your payments in a way that might make things easier. As much as you don’t want to file for bankruptcy, your creditors don’t want to have to hound you for repayment or pursue legal action against you. They’d much rather work with you to find a solution that’s mutually beneficial; and being hostile or dodging collections won’t garner you any sympathy.
Try Credit Counseling
A credit counselor is a great way to get your finances in order. They sit down with you, go over your financial history, your employment status, and help you figure out ways to pay down debt without having to resort to nuclear options (ie. bankruptcy). Sometimes all you need is a fresh pair of eyes and someone with a bit of know-how to help you budget properly, provide some education, and equip you with the right tools to get your finances restructured to pay down your debts. Many credit counseling agencies are free of charge, though it largely depends on local laws and what is available near you.
The US Department of Justice has a list of federally-approved credit counseling agencies on their website, which can be sorted by state.
Home Sale-Leaseback Program
Home sale-leaseback programs have been on the rise throughout the country and have shown to be successful in helping struggling homeowners pay down their debt. SKYDAN Equity Partners offers such a program — it helps homeowners use the equity in their home to pay down debt but with a few key differentiators from other similar programs:
- SKYDAN’s program doesn’t negatively affect your credit score
- You get to remain in your home throughout the duration of the program
- There are no monthly payments
- You decide whether you want to sell your home or stay in it at the end of the program
Our mission is to help homeowners access equity in their home to pay for life’s expenses, improve their credit, and set them up for long-term financial success. When banks say no, we say yes.