How to Avoid Bankruptcy: 9 Alternatives to Consider Before Filing

If you’re struggling financially, filing for bankruptcy may feel like the only option. However, it’s best to consider it as a last resort. Before you make the decision to pursue bankruptcy, consider these practical strategies to regain control of your finances.

From cutting expenses to negotiating debts, here are nine alternatives to bankruptcy to explore first.

Table of Contents

1. 1. Take a hard look at your spending
2. 2. Increase your income
3. 3. Sell assets you can live without
4. 4. Ask about hardship options
5. 5. Consider a debt consolidation loan or balance transfer card
6. 6. Tap your home equity
7. 7. Work with a credit counselor or financial coach
8. 8. Consider a debt management plan
9. 9. Look into debt settlement

1. Take a hard look at your spending

Financial difficulties aren’t always a result of irresponsible money management. However, it’s still important to get brutally honest about where your money is going.

Start by taking a look at your bank and credit card statements to get a feel for how you’re spending your income. It can help to categorize each expense over the past few months, so you can get a detailed view.

From there, identify non-essential expenses that you can cut immediately. Dining out, streaming services, unused subscriptions, and occasional impulse buys may seem inconsequential, but they add up quickly.

To stay on track with your spending goals, consider switching to a zero-based budget or a cash envelope system. Budgeting apps like You Need a Budget or Goodbudget can also help you track your expenses, stick to your goals, and stay accountable.

When considering bankruptcy, think about the pros and cons. I often begin by focusing on lifestyle adjustments and a disciplined budgeting strategy to create a realistic debt payoff plan. We may also explore refinancing or tapping into home equity when appropriate. If needed, I’ll refer clients to a reputable debt management counselor for additional support and guidance.

2. Increase your income

Cutting costs can only take you so far. For some people, the real game-changer is boosting what’s coming in.

If you have time outside your main job, consider picking up a side gig or part-time work. Driving for Uber or Lyft, delivering food with DoorDash, freelancing on Upwork or Fiverr, or taking retail shifts on evenings or weekends can add hundreds of dollars to your monthly budget.

If you’re between jobs or your hours have been reduced, check to see if you qualify for unemployment benefits or local community assistance programs. These can help with groceries, utilities, transportation, or housing while you get back on your feet.

3. Sell assets you can live without

Start by looking at things you don’t use often or can do without, such as a second vehicle, gaming consoles, unused exercise equipment, collectibles, or extra furniture. Even smaller items like electronics, jewelry, or clothing can fetch solid cash on platforms like Facebook Marketplace, Craigslist, or OfferUp.

If you’re in a deeper bind, consider downsizing your car or home to reduce ongoing expenses. Keep in mind, though, that these options can take time, and you may not always get top dollar in a rush sale.

Whatever you do, avoid tapping retirement accounts unless absolutely necessary. Early withdrawals can trigger steep taxes and penalties, and you’ll jeopardize your long-term financial security just to solve a short-term crisis.

4. Ask about hardship options

Many creditors offer hardship programs that can temporarily lower your interest rate, reduce your monthly payment, or even pause payments altogether. If your situation is short-term, ask about forbearance options that won’t damage your credit as badly as missed payments.

If you have medical bills, reach out to your provider and ask about income-based payment plans or other financial assistance programs that could significantly reduce your bill.

Since bankruptcy can remain on your credit report for up to 10 years, it can significantly impact your ability to secure future financing, such as obtaining a mortgage or auto loan. Additionally, many employers now review credit reports as part of the hiring process, and in certain industries—like finance—having a bankruptcy on your record could limit or delay career opportunities.  

5. Consider a debt consolidation loan or balance transfer card

A debt consolidation loan is a personal loan that offers fixed interest rates and structured repayment terms, making it easier to stay on track. If you have decent credit and want predictable monthly payments, this can be a great option.

Debt consolidation lenders like Happy Money can be a great place to get started. Many lenders offer prequalification tools that let you assess your eligibility and potential terms.

Alternatively, a balance transfer credit card might offer an introductory 0% APR for anywhere from 12 to 24 months, giving you a window to pay down high-interest balances without racking up new interest charges. This strategy can work well if you have good credit, a solid repayment plan, and enough discipline not to rack up new charges on your cards.

6. Tap your home equity

If you’re a homeowner, your equity could be a powerful tool for managing high-interest debt.

Home equity loans and home equity lines of credit (HELOCs) let you borrow against the value of your home, often at lower interest rates than personal loans or credit cards. A home equity loan gives you a lump sum with a fixed rate and set repayment schedule, while a HELOC works more like a credit card, offering revolving access with a variable rate.

This strategy isn’t without drawbacks, however. Terms and requirements can vary by lender, but you’ll need enough equity to qualify, and you could face upfront costs like appraisal or origination fees.

Most importantly, your home is on the line. If you fall behind on payments, you could risk foreclosure. Only pursue this option if you’re confident in your ability to repay.

7. Work with a credit counselor or financial coach

If you’re feeling overwhelmed trying to figure out your debt situation on your own, a trusted professional can help you make sense of your finances and build a plan that actually works.

Reputable nonprofit credit counseling agencies offer free or low-cost services to help you assess your financial situation, set realistic goals, and identify strategies to pay off your debt.

Alternatively, a financial coach can help you create better money habits, stick to a budget, and make informed decisions that support your long-term financial health. Whether you need short-term guidance or help developing lasting change, support is available.

8. Consider a debt management plan

If your credit card payments feel impossible to keep up with, a debt management plan (DMP) through a nonprofit credit counseling agency could offer some much-needed relief.

With a DMP, your counselor works with your creditors to potentially lower interest rates, reduce monthly payments, waive certain fees, and consolidate multiple payments into one monthly amount. These plans typically last three to five years, offering a structured path to becoming debt-free.

However, DMPs aren’t without trade-offs. You may have to close your credit card accounts, and missing payments could put you at risk of creditor action. Be sure to ask about setup and monthly fees and understand the commitment before enrolling.

9. Look into debt settlement

If you’re seriously behind on your payments and can’t see a way out, debt settlement might be an option. This strategy involves negotiating with creditors to accept less than what you owe — sometimes significantly less.

You can try to negotiate on your own or work with a debt settlement company or attorney. But tread carefully: settling debt can damage your credit, and forgiven debt might be considered taxable income by the IRS.

Make sure to thoroughly vet any company or individual offering settlement services. Look for clear fees, transparent terms, and a history of legitimate results. As you consider this option, start with our top choices for debt relief companies.

Ultimately, if the alternatives are not feasible, bankruptcy may be the best option. Additionally, if my client needs and wants a fresh start—and is willing to understand and accept the consequences—filing for bankruptcy is likely the appropriate path. I would refer them to a credit counselor, bankruptcy attorney, or a financial professional with bankruptcy experience.

---

Bankruptcy may feel like the only way out, but it’s rarely the first option you should explore. With the right strategy, support, and mindset, many people can avoid it entirely and get back on solid financial ground.

As you consider how to avoid bankruptcy, start by evaluating your debt, credit score, income, and spending habits. From there, determine which of the strategies above align best with your situation. Whether that means tightening your budget, increasing your income, consolidating debt, or seeking professional support, the key is to take action early.

If you’re unsure where to start, consider a free or low-cost consultation with a financial advisor with a service like Money Pickle.