Filing for bankruptcy is never an easy decision, but it can provide much-needed financial relief when you’re drowning in debt. Many people seek Chapter 7 bankruptcy because it allows for the discharge of most unsecured debts, giving them a fresh start.
However, not everyone qualifies. If you’ve failed the means test, earn too much income, or have already received a Chapter 7 discharge within the past eight years, you may need to explore other options.
The good news? Not qualifying for Chapter 7 doesn’t mean you’re out of solutions. There are ways to regain control of your finances and work toward a debt-free future.
1. Consider Filing for Chapter 13 Bankruptcy
If you don’t qualify for Chapter 7, Chapter 13 bankruptcy may be a viable alternative. Unlike Chapter 7, which wipes out debts, Chapter 13 focuses on restructuring your debt into a manageable repayment plan. Instead of liquidating assets, you’ll make monthly payments over a three- to five-year period based on what you can afford.
One of the key benefits of Chapter 13 bankruptcy is that it allows you to keep your home, car, and other valuable assets while catching up on missed payments. It also provides legal protection against creditors, meaning they can’t harass you or take legal action while you’re in the repayment plan.
“Your attorney will help put together and negotiate a plan for you to repay your financial obligations, most times at a fraction of what you owe,” Reed Law Firm, P.A. explains. “In exchange for the three- to five-year debt repayment plan as part of your Chapter 13 bankruptcy, you receive court-ordered protection and a discharge.”
If you have a steady income and want to avoid foreclosure or repossession, Chapter 13 could be the right solution for your situation.
2. Negotiate with Creditors
You don’t always need a formal bankruptcy filing to resolve your debt. Many creditors are willing to negotiate if you reach out proactively and explain your financial hardship. They would rather receive partial payments than nothing at all, which is why they often agree to lower interest rates, settle for a reduced balance, or offer flexible payment plans.
Start by calling your creditors directly and discussing potential solutions. You may be able to:
- Request a temporary hardship program that reduces payments for a set period.
- Settle your debt for less than what you owe (especially for medical or credit card debt).
- Refinance or consolidate loans to lower your interest rate and reduce monthly payments.
Having an open and honest conversation with your creditors can sometimes lead to a better outcome than bankruptcy, especially if your financial struggles are temporary.
3. Look Into Debt Consolidation
Debt consolidation is another option to explore if you don’t qualify for Chapter 7 bankruptcy. This involves combining multiple debts into a single loan with a lower interest rate, making repayment more manageable.
There are different ways to consolidate debt, including:
- Personal loans. You can take out a fixed-rate loan to pay off high-interest credit cards.
- Balance transfer credit cards. Some credit cards offer 0 percent interest for a limited time, allowing you to pay off debt faster.
- Home equity loans. If you own a home, you may be able to borrow against its equity to pay off outstanding debts.
4. Seek Credit Counseling and a Debt Management Plan
If handling your finances feels overwhelming, a nonprofit credit counseling agency can help. These organizations provide financial education, budgeting advice, and debt management plans (DMPs) to help you regain control.
A debt management plan allows you to make one monthly payment to the credit counseling agency, which then distributes the funds to your creditors. The agency may be able to negotiate lower interest rates and waive certain fees, making repayment easier.
DMPs are a good alternative to bankruptcy if you’re struggling with credit card debt but can afford to make consistent payments. However, they don’t work for secured debts like mortgages or car loans.
5. Consider Settling Your Debt
If you’re facing significant unsecured debt and can’t keep up with payments, you may be able to settle your accounts for less than what you owe. Debt settlement involves negotiating with creditors to pay a reduced lump sum in exchange for closing the account.
While this option can help you clear debt faster, it does come with some risks. Debt settlement can negatively impact your credit score, and not all creditors are willing to negotiate. Additionally, forgiven debt may be taxable, so it’s important to consider all financial implications before proceeding.
That said, if you’re already behind on payments and struggling to stay afloat, debt settlement may be a better alternative than filing for bankruptcy.
Get Your Financial House in Order
If your debt situation isn’t extreme but you’re still struggling to make ends meet, focusing on income growth and expense reduction may be the key to avoiding bankruptcy. Look for opportunities to earn extra income and/or cut unnecessary costs. Simple changes can go a long way (and may allow you to avoid bankruptcy altogether).
