If you are tormented by creditors and see no way of paying off your debt, bankruptcy may very well be your only lifeline. But in many cases, there are alternative ways to resolve your financial troubles without resorting to bankruptcy proceedings.
One of the purposes of declaring bankruptcy is to negotiate a payment plan with creditors. But you don't have to declare bankruptcy to start negotiating. Contact your creditors and see if they will allow you to make smaller minimum monthly payments. If you can't afford your mortgage payments, see if the lender will refinance at a lower interest rate.
If you need help negotiating with creditors, consider meeting with a nonprofit credit counseling agency. The Department of Justice maintains a list of reputable credit counselors on its Credit Counseling and Debtor Information page. A credit counselor has experience working with creditors and might be able to strike a deal.
There is something important to understand about negotiating with creditors, though. One of the advantages of declaring bankruptcy is that a portion of your debt — or all of it — will be discharged, meaning you won't have to pay it back. If you negotiate with creditors outside of bankruptcy, any deal you make will likely involve paying back the full amount [source: Nolo].
If your creditors refuse to negotiate, your final option is selling off any and all assets to repay the debt: house, car, boat, jewelry, furniture -- anything that will generate cash to lower the debt. Again, a benefit of declaring bankruptcy is that in most cases your home and personal possessions can't be seized by the court to repay your creditors.
Even if you ultimately decide that bankruptcy is your best option, you will be required to participate in credit counseling before you can file your paperwork [source: U.S. Courts]. The counselor will make sure you understand your options and help determine if bankruptcy is the only way out. Telephone and online counseling are available in most states.
Next we'll look at the differences between declaring the two most common types of individual bankruptcy: Chapter 7 and Chapter 13.