7 Alternatives to bankruptcy to consider before filing

When debt overwhelms your finances, you may consider filing for bankruptcy. This legal process controls and eliminates debt through the courts according to your ability to pay.

While it eases your financial stress, it can devastate your credit for up to a decade. Because of these risks, you should consider all alternatives before you file for bankruptcy. Learn how to avoid bankruptcy, which type of bankruptcy is best for your situation, and other options to pay off your debts.

What is bankruptcy?

Bankruptcy is a legal process that helps people eliminate or repay debt through a court-structured plan. Once you file, the court issues an automatic stay, which stops collection calls, lawsuits, and wage garnishments. You can also choose to “reaffirm” debts you want to keep—like a mortgage or car loan.

Common types include:

• Chapter 7 bankruptcy: Known as a “fresh start,” this wipes out most unsecured debts such as credit cards, payday loans, and older taxes. Available to both consumers and businesses, and often used when a business is closing.
• Chapter 13 bankruptcy: Creates a court-approved repayment plan lasting three to five years. You make monthly payments to a Trustee, who distributes funds to creditors. Allows up to $2.75 million in combined secured and unsecured debt.
• Chapter 11 bankruptcy: A more complex version of Chapter 13 for individuals or businesses with higher debt levels or who need longer repayment terms. It generally costs more and takes longer to complete.

Alternatives to bankruptcy

Many people consider bankruptcy when they’re struggling to make minimum payments, relying on credit cards for essentials, or facing increasing pressure from creditors.

However, it's a serious step with long-lasting consequences. Filing can feel emotionally and financially devastating, so it’s often considered only after exploring every other option:

Debt management plan (DMP)

You work with a credit counselor to combine unsecured debts (like credit cards) into a single monthly payment to the counseling agency, which then pays your creditors. Often, interest rates are reduced or fees waived.

Pros: Simplifies payments, can lower interest, avoids bankruptcy.

Cons: Requires discipline to stick to the plan; may take 3–5 years to complete.

Debt settlement

Settling your debts involves negotiating with your creditors to repay your debts for a fraction of their current balance. With debt settlement, you may need to make a one-time payment or make payments over time. Debt settlement companies can assist, but you can also negotiate directly.

Pros: Can reduce debt significantly, avoids bankruptcy.

Cons: Can hurt credit score, may incur tax consequences on forgiven debt, not guaranteed.

Debt consolidation loan

With debt consolidation, you can take out a new loan to pay off multiple debts, leaving you with one monthly payment. In many cases, you'll lower the interest charges or monthly payments with the new loan.

Pros: Simplifies finances, may lower interest and monthly payments.

Cons: Requires good credit to qualify for best rates; puts your assets (sometimes your home) at risk if secured.

Balance transfer credit card

Move high-interest credit card debt to a card with a low or 0% introductory APR, giving you time to pay off debt without interest. This generally works best for smaller balances.

Pros: Can save on interest if debt is paid off during the intro period.

Cons: Usually short-term (6–18 months); fees may apply; credit score can be impacted.

Refinancing or restructuring existing loans

Modify terms of current loans (mortgages, auto, personal) to extend repayment, lower interest, or adjust monthly payments. You'll generally need to reach out to creditors yourself, and some may require proof of financial hardship.

Pros: Makes monthly payments more manageable, can save on interest.

Cons: May lengthen repayment period and increase total interest paid.

Asset-backed consolidation

If traditional debt consolidation isn’t an option due to poor credit or high interest rates, you can use assets you already have—like home equity or a 401(k)—to consolidate debt.

Home equity tools typically offer lower interest rates and longer repayment terms than unsecured debts. Plus, flexible repayment options (HEI has no monthly payments; HELOC allows borrowing as needed). However, it's important to remember that your home is used as collateral—missed payments can result in foreclosure.

• Home equity line of credit (HELOC): A revolving line of credit secured by your home’s equity. Borrow what you need, repay, and borrow again during the draw period.
• Home equity loan: A lump-sum, fixed-rate loan backed by your home’s equity. You repay with fixed monthly payments over the loan term.
• Home equity investment (HEI): You get a lump sum, with no monthly payments. Instead, you repay the investment plus agreed-upon share of appreciation when you sell, refinance, or buy back the equity anytime during a flexible 30-year term.

A 401(k) loan, on the other hand, allows you to borrow from your 401(k) retirement account (usually up to 50% of the vested balance, max $50,000) and repay yourself with interest over a set term.

• Pros: No credit check required, interest paid goes back into your account, can be faster than other loans.
• Cons: Reduces retirement savings temporarily; failure to repay triggers taxes and penalties; job loss can accelerate repayment.

Temporary side income or asset sale

Sometimes, boosting your cash flow may be easier than cutting your monthly expenses or rearranging your debt. Take on extra work or sell unused items to generate cash for debt repayment. Depending on your situation, consider applying a cash windfall to your debt.

Pros: Immediate influx of cash, avoids formal programs, can reduce debt quickly.

Cons: Not sustainable long-term; may not cover all debts.

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What to do if you're considering bankruptcy

Filing for bankruptcy can be a difficult decision for people with financial worries. Although it stops collection calls, wage garnishments, and foreclosure, it has a lasting impact on your credit. If bankruptcy is on your mind, consider speaking with a credit counselor or a bankruptcy attorney first. They can review your finances, explore alternatives to bankruptcy, and even negotiate with creditors to set up more manageable payment plans.