When a Bankruptcy Alternative Won't Help You

(Just because you do not fit any one of the following criteria for "When bankruptcy alternatives don't work", it does not mean success in a debt relief plan is automatic.  Results do vary and program completion depends on your ability to save sufficient funds and creditor cooperation.)

1. You have insufficient income. In general, you should be able to commit AT LEAST 1.5% of your total outstanding balance to your debt reduction plan. In other words, for $10,000 of debt you should be able to afford at $150 every month. If this isn’t possible, then it’s not likely that you’ll be able to avoid bankruptcy. Even with debt negotiation, you must be able to commit a decent percentage of your income every month for it to work. Other debt relief alternatives like credit counseling are even more expensive on a month to month basis.  By far the biggest cause of failures in debt relief programs is when clients fail to accurately estimate what they can afford on a monthly basis, forcing them to drop out of the program before it's ever completed.

2. Your creditors think you were fraudulent in your dealings with them. That is, if your creditors feel that you used credit without having any intention of paying them in full according to the terms stipulated, they may refuse to accommodate you by lowering your interest or balance. When do creditors consider someone fraudulent? Here are a few examples:

a. Recent, large cash advances without payments
b. Taking out a loan without making at least 6 payments
c. Recent luxury purchases without payments

3. Your income fluctuates dramatically each month. This definitely affects the success of credit counseling and to a lesser degree, debt settlement. With credit counseling, one missed payment is grounds for the credit card companies to drop you from their special interest rates. If your income fluctuates a lot or if the monthly payment leaves no breathing room in the event that a random expense comes up (car repair, dentist bill, etc.), then perhaps you’ll have difficulty completing your debt relief program.

4. You have secured debts. Unfortunately, there is little that a debt relief company can do to help with secured debts. Simply put, creditors must feel that entering into debt negotiations with a client is beneficial to their bottom line, and since a lender has the property as collateral (even if you file bankruptcy), they have very little incentive to work out a deal outside of the original contract’s stipulations.

5. It won’t help you learn your lesson. Some consumers have used debt reduction services and found themselves in credit card debt trouble years later all over again. The purpose of debt settlement is not just to settle your debts---it’s also about changing your behavior (if necessary) and helping you start building wealth, not debt. If your debt problem is the by-product of overspending, not a financial hardship, one of the main goals of your debt negotiation program should be changing your spending habits.