Negotiate With Your Creditors

If you have some income, or you have assets you're willing to sell, you may be a lot better off negotiating with your creditors than filing for bankruptcy. Negotiation may buy you some time to get back on your feet, or you and your creditors may agree on a complete settlement of your debts for less than you owe.

Get Outside Help to Design a Repayment Plan

Many people can't do a good job of negotiating with their creditors or with collection agencies. Inside, they feel that the creditors and collectors are right to insist on full payment. Or the creditors and collectors are so hard-nosed or just plain irrational that the process is too unpleasant to stomach.

If you don't want to negotiate on your own, you can seek help from a nonprofit credit or debt counseling agency. These agencies can work with you to help you repay your debts and improve your financial picture. (To find out about agencies in your area, go to the website of the United States Trustee, at http://www.usdoj.gov/ust, and click "Credit Counseling and Debtor Education"; this will lead you to a state-by-state list of agencies that the Trustee has approved to provide the credit counseling that debtors are now required to complete before filing for bankruptcy.)

Debt Counseling vs. Chapter 13 Repayment Plans

Participating in a credit or debt counseling agency's debt management program is a little bit like filing for Chapter 13 bankruptcy. But working with a credit or debt counseling agency has one advantage: No bankruptcy will appear on your credit record.

However, a debt management program also has some disadvantages when compared to Chapter 13 bankruptcy. First, if you miss a payment, Chapter 13 protects you from creditors who would start collection actions. A debt management program has no such protection and any one creditor can pull the plug on your plan. Also, a debt management program usually requires that your debts be paid in full. In Chapter 13 bankruptcy, you often pay only a small fraction of your unsecured debts.

Consumer advocates have also raised concerns about credit counseling agencies, because these agencies receive most of their funding from creditors. As a result, critics say, these agencies could face a conflict between the interests of their funders and the interests of their clients.