Top 5 ways to address Debt without Filing Bankruptcy

I am a bankruptcy attorney and if you are considering filing for bankruptcy I WANT YOUR BUSINESS! That said, I am also a Counselor and part of my job is to make sure that before you file bankruptcy you have reviewed all of your non-bankruptcy options. So what are those options??

1) Borrow against your cash value life insurance policy

     Cash Value life insurance tends to be a scam in my opinion. They are popular with Insurance agents because they pay high commissions. The good news is that if you bought one (or maybe your parents purchased one for you as a child) then you can take out a loan against the proceeds. Much like a 401k loan that we will talk about later, you can borrow money without having tax consequences as long you comply with specific requirements. This is something you should talk about with the insurance company before you take out the money. 

2) Sell Investments held outside of retirement accounts

If you have investments (primarily stocks but any investment can do) you can liquidate those investments to pay your high interest loans. If you consider that your rate of return on stocks maybe 4% or 5 % but the interest on your credit cards can easily be 22% or more, then the math really tells you what you should do. Keep in mind though that selling stocks or other investments will likely have some tax consequences. 

3) Use your home equity

If you own a home in todays market, there is a good chance you have equity in the property. Over the last 2 years I have seen significant increases in property values. Usually you can get a loan for up to 80% of your homes value through a Home Equity Loan. Home Equity Loans have much lower interest rates than credit cards or debt consolidation loans and the interest you pay may be tax deductible.  I will say though as a Bankruptcy attorney this option is one I usually warn against. First, you are converting unsecured debt to secured debt. Second, at least here in Texas, your homestead is almost always able to be exempted so creditors cannot touch it. I would really encourage you to speak with a bankruptcy attorney before taking this route.

4) Borrow Against your Retirement Account

This is another possible solution that I see people take that I really warn against. Basically, while you work and pay into a 401k or something similar, that account grows. The money you pay in is not taxed and you may avoid taxes all together depending on the type of program you pay into and when you take your money out. Most of these types of accounts allow you to take out a loan against the proceeds in the account if you can meet a "hardship" requirement. You can use the money to pay off credit cards, personal loans, or other debts. As with the Home Equity, the biggest issue I have with this is that your 401k or other retirement account is protected when you file the bankruptcy. That money is not going anywhere. So you are going to end up paying out money it took you a long time to acquire that you could have kept if you had filed for bankruptcy.

5) Lean on Family 

If you have family that can help you get out of debt then use them. It sounds bad but if you have someone who is in a position to help you, then accept that help. It is something that is hard for all of us but they are offering because they love and care about you. Make sure you protect yourself and them by drawing up a simple agreement that outlines how much they are loaning you and what the repayment terms are. The biggest thing with borrowing money from your family is that you better pay them back or Thanksgiving will be a mess.