Deciding to file for bankruptcy requires you to look for alternative ways to achieve your goal of being financially debt free. There are several approaches, and each achieves the result you are looking for, with different effects on credit scores.

Debt payment It seems like a no-brainer and is what we should all strive for if we have the means to do so. However, paying off general unsecured credit card debt is the lowest budget priority, and when there is no money left, it should not be paid. Sticking to a strict budget requires discipline, but the effort will pay off when debt is eliminated without filing for bankruptcy. I recommend Dave Ramsey’s program based on his book Total Money Makeover for eliminating debt through payment.

Debt payment It is where you negotiate with creditors to pay less than you owe on the debt. Typically, debt is already in default and has a negative impact on credit ratings. Negotiating a debt can save you 50% of what you owe. There is a danger in paying off debts for less than what is owed. One catch is that you can end up owing income taxes on canceled debt. Another pitfall is that your credit score may take longer to improve when debts are settled when the creditor updates the information with your settlement payment.

A #protip here is to make sure you are legally obligated to pay any debt before doing so. In all states, there are laws that limit the time a creditor can take legal action called the Statute of Limitations. On California The statute of limitations for a written contract (a debt you signed as a credit card application) is four (4) years. After that, you are no longer legally obligated to pay the debt, unless the creditor has sued you and obtained a judgment in a court of law. Getting help from a credit counseling agency is helpful for those who are not comfortable negotiating with their creditors.

Sometimes doing nothing can be the right approach. If you have a social security disability or don’t own anything of value, creditors may not be able to collect anything from you. If it is “fail-safe,” you may not need to pay your debts or file for bankruptcy. However, this strategy does not work for family support obligations or taxes.

Not-so-helpful alternatives to bankruptcy include refinancing mortgages to pay off debts or consolidating debts. Basically, getting a new loan to pay off old debts does not eliminate the debt. However, these can be wise moves if you lower the interest rate or give you an income tax write-off like a mortgage on a house. Otherwise, more debt is not the answer.