It used to be that if for whatever reason, you found yourself drowning in a sea of debt, you could always depend on filing for bankruptcy as your last lifeline to solvency. The new bankruptcy law, effective as of October 2005, changes all of that. It is the largest overhaul of the United State's bankruptcy laws since the nineteen seventies.



The old bankruptcy law was weighted towards giving the debtor a break and helping him to regain his financial footing by allowing him to discharge some of his debts. The new law, however, is weighted much more towards giving the creditors a break and is meant to discourage bankruptcy filings by making them tougher to get. It is also meant to make sure that you will not be able to write off some of your debts at all.

This year, over one and a half million Americans will file for bankruptcy. Deciding to file for bankruptcy has never been an easy decision but the changes in the law make it more important than ever that you first look for viable alternatives before you file for bankruptcy.

Negotiated settlements

The best alternative to filing for bankruptcy is to work out some kind of negotiated settlement with your creditors. This is a very flexible alternative and can take many forms. Creditors do not like doing this but they recognize that it's much better than taking you to court and possibly risk getting nothing at all.

The most popular type is where the creditor will agree to write off a significant part of what you owe in return for a lump sum payment of a much smaller amount. Why would a creditor do this? In many cases it's simple economics. Lenders already have overhead built into the loan. They have already recouped all or most of their expenses through what you've already paid. The agreed upon lump sum will be designed to make up for the rest.

Another popular type of negotiated settlement is one where the debt is not reduced but merely delayed. This is great if, for example, you've had a hard time finding a job with enough income to support you but you are expecting job market conditions to change in the near future. In this case, you may be able to convince the creditor to let you "skip" a few month's payments until you get back on your feet.

If you meet certain conditions, many credit card companies will be willing to do this by what's referred to as "re-aging". In essence, they will bring your account up to date so you are no longer in arrears. The amount you owe may or may not be changed, depending on their policies. In some cases, it remains the same but the loan is simply extended. For example, if your last payment was due on March 2, 2009 and you receive a three month re-age, your last payment would be changed to come due on June 2, 2009.

Debt Consolidation

If you listen to television or radio commercials, debt consolidation is often offered as a panacea for bankruptcy. But debt consolidation does not typically reduce the amount you owe, it simply consolidates your debts into one payment. In addition, many debt consolidation services come with non-refundable upfront fees and other unnecessary "debt educational services" which rather than decreasing your debt load, increase it.

Unfortunately, because of the new bankruptcy law, you have fewer viable options than before. And it's more imperative than ever to seriously seek other solutions before filing bankruptcy.