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For many years, I was a bankruptcy lawyer. As opposed to when I practiced litigation (suing people and defending lawsuits), bankruptcy was a dream practice. Nice people — respectable, responsible people — would come in to see me and they would be worried, distraught, overwhelmed.

No one really wanted to be there, they hadn’t planned on filing bankruptcy, they had always kept a budget, but typically, something had happened that was a tipping point. Maybe the husband lost a job, or the wife fell ill, or some other major life event occurred such that they could not pay their bills as they normally had and preferred to do.

Bankruptcy was a dream practice because usually I was able to solve their financial woes, and I had plenty of clients — almost half a million people filed last year. A Chapter 7 bankruptcy (or BK, as we call it) would eliminate most or all of their debts and they would get a clean slate. No litigation client ever wrote me a thank-you note, but plenty of my bankruptcy clients did.

That said, bankruptcy is not for everyone. There are times when it is not the right solution. It might be that:

• You don’t want to give up your home equity. There is a limit to the amount of equity you can have and still file BK. Usually it is around $50K; it varies by state. If you had $100K in equity, a BK would not be a viable solution because the bankruptcy trustee would sell your home and use the equity amount above your state limit to pay off your creditors (you would keep the difference).
• You don’t want to ruin your credit. A bankruptcy will stay on your credit report for a decade.

If you find yourself in debt and you would rather not or cannot file BK, do you have options? Indeed you do. Here are three that I used with various clients.

1. Negotiations and debt settlement

One way out is to negotiate with your creditors. This approach involves working directly with the people and companies to whom you owe money to reduce the amount. The goal is to offer a lump-sum payment that is less than the total balance, and in exchange, the creditor agrees to forgive the remaining debt.

The key to doing this successfully is three-fold:

• First, you need some money. I would suggest at least half of your total debt, but sometimes even 25% would work. This is the pool you will use (or your lawyer will use) to negotiate with. You may need to use home equity, or a special type of personal loan called a hardship loan to create this fund.
• Second, the other side needs to agree to take less than what you owe.
• And third, you need some leverage, a reason for the creditor to say yes.

The best leverage you can have is a legitimate threat of filing bankruptcy, because, with all unsecured debts, creditors get zero on the dollar. So the strategy is to call them up and say something like:

“We are in over our heads financially and would like to settle our debt with you. I can pay $0.10 on the dollar (it’s a good idea to start low), if that doesn’t work, we will very likely have to file Chapter 7 bankruptcy.”

Then you negotiate. The reason you need upfront money is that if the creditor agrees, they will want to be paid in full for the new, agreed-upon amount. If you can settle for $0.25 on the dollar, it’s a home run. But even settling for 50% is amazing.

2. Debt consolidation

Here, you have two options.

You can consolidate debt with the assistance of a nonprofit credit counseling agency, or a company that does the same thing. Here, you would combine all of your different debts into one manageable payment and the debt relief agency you are working with would work with all of your creditors to take the payment they arrange. Often, in exchange for the guarantee of the payment, interest rates are reduced.

The downside? While debt consolidation can simplify your payments, it does not reduce the amount you owe. That is why this is usually not a great solution.

Second, you can simply take out a debt consolidation loan and do this yourself. Click here to see our picks for the best consolidation loans.

3. Do nothing

This “solution” always surprised my clients, but it is the best course sometimes. If you are what we would have called “an empty pocket,” meaning you have no real assets nor savings, then it usually does not behoove your creditors to come after you, sue you, or harass you because it would only take up time and not get them anything in return.

Once creditors realize you are an empty pocket, they will likely just leave you alone. Yes, your credit will take a big hit as they write-off the debt, but then again, your credit already probably has taken a hit if this is your situation. After a while, without the harassment and paying off the debt, you will be able to get back on your feet and recover financially and get your credit score back up.

So the good news is, yes, you have options. Some are better than others, but hey, it sure beats not sleeping at night, right?

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