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

debt payment seems like a no-brainer and is what we should all strive for given the means to do so. However, paying down debt on 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 takes discipline, but the effort will pay off when you eliminate debt without filing for bankruptcy. I recommend Dave Ramsey’s program based on his book Total Money Makeover for eliminating debt through payment.

debt payment is where you negotiate with creditors to pay less than you owe on the debt. Typically, the debt is already past due and has a negative impact on credit scores. Debt negotiations can save you 50% of what you owe. There is a stumbling block to paying off debts for less than what is owed. One catch is that you may end up owing income taxes on the 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 off any debt before doing so. In all states, there are laws that limit the time in which a creditor can take legal action, which is called a statute of limitations. In California the statute of limitations on a written contract (a debt you signed for like a credit card application) is four (4) years. After that, he is no longer legally obligated to pay the debt, unless the creditor has sued him 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 have anything of value, creditors may not be able to collect anything from you. If you are “judgment-proof,” 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 mortgage refinancing to pay off debts or debt consolidation. Essentially, taking out a new loan to pay off old debt does not eliminate debt. However, these can be wise moves if you lower the interest rate or give you an income tax deduction like a mortgage on a home. Otherwise, more debt is not the answer.