Consumer debt liquidation can take on many forms — from selling off personal assets to declaring Chapter 7 bankruptcy. All of these options should be carefully considered before beginning any.
Financial liquidation is defined as converting assets into cash in a debt clearing process. More common among businesses, consumer liquidation can possibly be considered a “last option” for consumers and families. But if you are swimming in a pool of credit card or loan debt, it may be helpful to at least consider some of your options for liquidation.
Nerd Wallet advises that consumers should only consider debt liquidation if they do not believe they will pay down all debt like credit card bills or personal loans within five years or if the debt that isn’t paid off is at least half of your gross income.
It is highly advised that you speak to a financial counselor before proceeding with any type of debt liquidation plan.
Selling Off Your Assets
Liquidation is usually only considered when facing extreme financial insecurity such as a job loss, reduction in salary or large unexpected costs like medical bills or a housing repair, according to the Nest.
Consumers can think about things they own that they can sell to help them pay off their debt. Liquidation usually means selling large or high-priced items like cars, property, jewelry or antiques. But, make plans for what you will do as an alternative. For example, if you are considering selling your car, do you have another reliable method of transportation? Is it possible to sell a higher priced car for a cheaper but still reliable vehicle?
Greenpath Financial Wellness warns about cashing out or selling a retirement account unless absolutely necessary. Fees and penalties may apply. This should only be considered if debt is crippling a consumer or family and only after speaking to a trusted financial advisor.
Liquidation Via Bankruptcy
The natural extreme of liquidation is filing for bankruptcy. Before doing so, the Nest strongly recommends consulting with a bankruptcy attorney. They also advise consumers to understand that filing for bankruptcy can have an extremely detrimental effect on their credit scores and limits.
In essence, bankruptcy erases debt including personal loan, credit card, medical bills, overdue rent and past bills. However, child support and recent tax debt cannot be forgiven, according to Nerd Wallet. Typically, student loan debt is not able to be erased.
Nerd Wallet warns that a consumer’s credit limits and scores are likely to be low until 10 years after the bankruptcy claim has been filed. Due to the serious ramifications of filing, people who choose this route have likely exhausted every option.
Alternatives to Liquidation
Consumers may be able to effectively manage their debt by trying a number of debt relief programs and strategies. A debt management plan allows consumers to group loan or credit card payments into one lump sum payment with lower interest rates. If this is an option, Nerd Wallet recommends using a nonprofit credit counseling agency accredited by the National Foundation for Credit Counseling. This strategy may have a less negative effect on your credit.
Finally, even when debt seems overwhelming, visiting a financial counselor may give you more valuable information on how to effectively manage your debt using less extreme methods.