Because all forms of bankruptcy have some consequences on your credit, it is important to explore all non-bankruptcy options first. One alternative to bankruptcy is to re-evaluate your current lifestyle. You can work to reduce your expenses so that you can afford to pay off your debts. You may be able to reduce your expenses or obtain money to repay your debts by:
- Selling a second vehicle
- Obtaining a loan from a relative
- Selling your home
- Cashing out on your 401K or other retirement benefits
- Selling any valuable assets, such as jewelry or family heirlooms
If, however, your expenses are already as low as possible and you are unable to sell enough assets to repay the debts you owe, you may need to look at other alternatives. Other non-bankruptcy alternatives to bankruptcy Chapter 7 may include:
- Contacting Consumer Credit Counselors. They can help you make a budget and negotiate a repayment plan with credit card companies to obtain a reduced interest rate on your debt
Workouts. Workouts are modifications of debt that are agreed upon by both the debtor and his or her creditors. Essentially, the debtor agrees to repay the debt at a slightly lower amount or with extended repayment terms. Creditors are often receptive of such agreements because they avoid the procedural requirements of bankruptcy. Additionally, they are often more likely to receive the money they are owed. This is due to the class system of distribution in Chapter 7 bankruptcy. Debtors often prefer workouts because the debtor avoids the negative credit issues associated with Chapter 7 bankruptcy, as well as the stigma of filing bankruptcy. Additionally, the debtor preserves his right to file for bankruptcy in the future, if necessary.
Compositions and Extensions. Compositions and extensions are forms of workout agreements that exist between a debtor and his creditors. Compositions are contracts entered into by at least two creditors where the creditors agree to accept partial payment of the debt owed in full satisfaction of the debtor’s claims. An extension, on the other hand, is a contract, also between a debtor and two or more creditors, in which the creditors agree to extend the time for repayment. Some agreements are both compositions and extensions, where creditors agree to accept less money over an extended period of repayment.
Compositions and extensions are governed by contract law, rather than the debtor-creditor rules that govern general creditors’ rights claims. There is no requirement that all creditors enter into a composition or extension. However, most creditors must voluntarily enter into the agreement for it to work effectively. This is because creditors who do not agree to the composition or extension retain their rights under state and federal law to collect any debts owed. This may include filing for involuntary Chapter 7 bankruptcy against the debtor. The majority of creditors enter into such agreements because they are more likely to recover the debt owed and can avoid the hassle of going through the bankruptcy process.
Assignment for the Benefit of a Creditor. While workouts, including compositions and extensions, are similar to the Chapter 13 bankruptcy reorganization process, assignments are similar to the Chapter 7 liquidation process. An assignment occurs when a debtor assigns all non-exempt property to an assignee that liquidates the assets and distributes the proceeds among the creditors. All creditors must enter into an assignment, including secured creditors of the debtor, to be enforceable. Unsecured creditors often agree to assignments for the same reasons as stated above. They can avoid the complex bankruptcy proceedings and obtain the money owed in a timely fashion. Secured creditors are often also amenable to such an agreement because they can avoid the legal costs and risks associated with foreclosure proceedings.
Alternatives to Bankruptcy Chapter 7: Chapter 11 and Chapter 13
Although non-bankruptcy alternatives are preferable, sometimes bankruptcy is inevitable. When you are facing bankruptcy, it is important to decide which bankruptcy options best fit your current circumstances. There are two main forms of bankruptcy that are often alternatives to Chapter 7 bankruptcy: Chapter 11 bankruptcy and Chapter 13 bankruptcy.
Chapter 11 Bankruptcy. Chapter 11 bankruptcy is an alternative for business entities, including corporations, partnerships, and sole proprietorships, that wish to avoid liquidation and continue their business operations. Under Chapter 11 bankruptcy, the court allows a debtor to repay a smaller amount of debt or to repay existing debt over an extended time period.
Chapter 13 Bankruptcy. Chapter 13 bankruptcy is an alternative for individual debtors (and some sole proprietorships) with regular income streams. Under Chapter 13 bankruptcy, a debtor can repay his debts over a period of three to five years. During this time, he can retain his non-exempt property, including any real property. During the repayment period, no interest or late fees accrue. Upon completion of the agreed payments, the entire debt is discharged and the homeowner retains ownership of any real property. Many people prefer Chapter 13 bankruptcy over Chapter 7 bankruptcy because you can retain any real property. Additionally, creditors view it more favorably. However, the downside is your credit report still reflects the bankruptcy for seven years after you finish paying off debts. See the “Process of Chapter 13 Bankruptcy” page for more information on Chapter 13 bankruptcy.
If you are considering filing for Chapter 7 bankruptcy, a Washington DC and Maryland Chapter 7 bankruptcy lawyer should assist you. You can view all alternatives and make the ultimate decision regarding which course of action to take. Contact attorney Kevin D. Judd today for a free consultation to answer any questions you may have and to assist you throughout the bankruptcy process.
People who are facing severe financial difficulties often think that bankruptcy is the main way to solve their problems. While bankruptcy is certainly an option to consider, it may not be the only path to financial stability or the path that best fits your circumstances. A less drastic alternative may allow you to get out from under your debts enough to put your life back together. For example, if you are mostly concerned about harassing actions by creditors, you may want to explore your legal rights under the Fair Debt Collection Practices Act and parallel state laws. You might be able to get a creditor to stop or reduce its efforts by filing an action against it.
In other situations, a debtor who has some income or property might be able to develop a repayment plan with a creditor that allows them to pay off a debt in smaller installments. They might also be able to negotiate the debt down to a more manageable amount. Many creditors realize that they are not likely to be paid back if a debtor files under Chapter 7, since all or most of their assets likely will be exempt. This gives a creditor or collection agency some motivation to settle for a lesser amount or give you more time to pay if you think that your financial situation will improve soon.
Assistance from Credit or Debt Counseling Agencies
If you would prefer not to confront a creditor or collection agency on your own, you can consider getting assistance from a credit or debt counseling agency. These are non-profit entities that specialize in helping debtors repair their finances without filing for bankruptcy. You can find a list of agencies in your state that are approved by the U.S. Trustee under the Credit Counseling and Debtor Education section of its website. (Even if you eventually decide that bankruptcy is your best option, you will be required to complete a credit counseling course before filing.)
A credit or debt counseling agency can develop a debt management program that is similar in some ways to a repayment plan in a Chapter 13 bankruptcy. The main reason to choose a debt management program over Chapter 13 is that your credit record will not show a bankruptcy. However, you should also be aware of drawbacks to using a debt management program. You probably will need to pay back the full amount of your debts, and you will be vulnerable to collections efforts as soon as you miss a payment, whereas Chapter 13 gives debtors some flexibility.
Not every credit or debt counseling agency is legitimate. You should carefully investigate a company’s track record before signing up for its services. If an offer to settle or get rid of your debts sounds too good to be true, it probably is. More generally, credit counseling agencies have been called into question because they receive funding from creditors, which could lead to conflicts of interest.
Judgment Proof Debtors
If you have almost no assets or income, you may be judgment proof, which means that a creditor has nothing from which to collect a debt. Even if a creditor gets a judgment against you, they cannot take away basic necessities of life to satisfy it. For example, you have a right to government benefits, unemployment benefits, food, clothing, and any other income or property needed to ensure your basic health and safety. You will not go to jail for refusing to pay a debt, except in some rare cases involving child support or taxes. However, any judgment that a creditor has received against you remains valid and can be enforced as soon as you acquire assets or income from which it can collect. You can read more here about what it means to be judgment proof.
Bankruptcy is a legal process to help individuals or businesses who cannot pay their current debt. There are a few different bankruptcy options depending on the individuals or businesses situation. Bankruptcies are filed in federal court and there is a fee to file.
Bankruptcy options for personal debt include a Chapter 7, which is the most common type of bankruptcy. This involves a liquidation of assets. After an individual shows proof of debt, income and assets, the bankruptcy court reviews the financial records and determines if the debt to income ratio is high enough to grant a bankruptcy.
Certain assets may be seized by the court, then sold and the money is divided up and given to the creditors. The remaining debt would be eliminated through the court. Certain types of debt are prohibited by law from being eliminating, for instance, child support, federal student loans or taxes owned to the Internal Revenue Service are not eliminated.
Some assets are protected by state and federal law and considered exempt from liquidated in a chapter 7. For example, retirement accounts, such as a 401(k) are protected. Although exemptions may vary, they usually include a car, primary home, clothes and furniture.
Other personal bankruptcy options include a chapter 13. This is different from a chapter 7, because it requires a percentage of the debt be repaid and is considered a reorganization of debt. Similar to a chapter 7, all financial records need to be provided to the court and reviewed. Individuals who want to keep all their assets may decide on this option.
In a chapter 13 bankruptcy, the court decides what percentage of the debt must be repaid. That percentage is broken down into monthly payments made to the bankruptcy trustee, who pays the creditors. Individuals who file a chapter 13 usually have three to five years to pay off the bankruptcy debt.
A chapter 11 bankruptcy is similar to a chapter 7, in that assets of the business are sold and the money is divided up and given to creditors. Although a chapter 11 bankruptcy can also be filed by individuals, it’s more common for businesses. Businesses may be allowed to continue to operate even after they file a chapter 11.
A chapter 12 bankruptcy is a reorganization bankruptcy that works the same way as a chapter 11. It is specifically for farm owners, and allows liquidation and repayment of debt. This option was intended for farmers who were unable to pay their debt but did not want to lose their farm.
A bankruptcy usually remains on the debtor’s credit report for ten years. However, filing a bankruptcy may be the best option for certain individuals or businesses. Various types of bankruptcy options can provide a fresh financial start. Regardless of the type of bankruptcy filed, it’s important to learn from past financial mistakes to avoid repeating them.
Bankruptcy is a necessary thing in a capitalist economic system. As already noted, without it, few people would be willing to take business risks, and the economy would necessarily operate at a lower level (something some people might not think so bad overall). But bankruptcy, however “enlightened” society may have become about it since Victorian days, still carries a stigma. Bankruptcy filings are public information; the lists of people and businesses who declare bankruptcy are regularly published in monthly business journals. Bankruptcy is expensive, too, and both debtors and creditors become enmeshed in significantly complex federal law. For these reasons, among others, both parties frequently determine it is in their best interest to find an alternative to bankruptcy. Here we take up briefly three common alternatives.
In other parts of this book, other nonbankruptcy creditors’ rights are discussed: under the Uniform Commercial Code (UCC), creditors have rights to reclaim goods sold and delivered but not paid for; under the UCC, too, creditors have a right to repossess personal property that has been put up as collateral for the debtor’s loan or extension of credit; and mortgagees have the right to repossess real estate without judicial assistance in many circumstances. These nonbankruptcy remedies are governed mostly by state law.
The nonbankruptcy alternatives discussed here are governed by state law also.
Assignment for Benefit of Creditors; Compositions; Receivership
Assignment for Benefit of Creditors
Under a common-law assignment for the benefit of creditors , the debtor transfers some or all of his assets to a trustee—usually someone appointed by the adjustment bureau of a local credit managers’ association—who sells the assets and apportions the proceeds in some agreed manner, usually pro rata, to the creditors. Of course, not every creditor need agree with such a distribution. Strictly speaking, the common-law assignment does not discharge the balance of the debt. Many state statutes attempt to address this problem either by prohibiting creditors who accept a partial payment of debt under an assignment from claiming the balance or by permitting debtors to demand a release from creditors who accept partial payment.
A composition is simply an agreement by creditors to accept less than the full amount of the debt and to discharge the debtor from further liability. As a contract, composition requires consideration; the mutual agreement among creditors to accept a pro rata share of the proceeds is held to be sufficient consideration to support the discharge. The essential difference between assignment and composition lies in the creditors’ agreement: an assignment implies no agreement among the creditors, whereas a composition does. Not all creditors of the particular debtor need agree to the composition for it to be valid. A creditor who does not agree to the composition remains free to attempt to collect the full sum owed; in particular, a creditor not inclined to compose the debt could attach the debtor’s assets while other creditors are bargaining over the details of the composition agreement.
One advantage of the assignment over the composition is that in the former the debtor’s assets—having been assigned—are protected from attachment by hungry creditors. Also, the assignment does not require creditors’ consent. However, an advantage to the debtor of the assignment (compared with the composition) is that in the composition creditors cannot go after the debtor for any deficiency (because they agreed not to).
A creditor may petition the court to appoint a receiver; receivership is a long-established procedure in equity whereby the receiver takes over the debtor’s property under instructions from the court. The receiver may liquidate the property, continue to operate the business, or preserve the assets without operating the business until the court finally determines how to dispose of the debtor’s property.
The difficulty with most of the alternatives to bankruptcy lies in their voluntary character: a creditor who refuses to go along with an agreement to discharge the debtor can usually manage to thwart the debtor and her fellow creditors because, at the end of the day, the US Constitution forbids the states from impairing private citizens’ contractual obligations. The only final protection, therefore, is to be found in the federal bankruptcy law.
Bankruptcy is expensive and frequently convoluted. Nonbankruptcy alternatives include assignment for the benefit of creditors (the debtor’s assets are assigned to a trustee who manages or disposes of them for creditors), compositions (agreements by creditors to accept less than they are owed and to discharge the debtor from further liability), and receivership (a type of court-supervised assignment).
If you are considering filing for bankruptcy, explore all of your other options first. Bankruptcy is an appropriate solution for some people, but it should be your last resort. Let’s walk through some bankruptcy alternatives so you leave no stone unturned.
Credit/Debt Counseling & Debt Management Plans
There are some legitimate companies, including GreenPath, that offer free debt counseling to people who want to get out of debt. If you have significant credit card debt, you may be a candidate for a debt management plan. With a debt management plan, you make regular payments to the credit counseling company, and they make payments on your behalf to the creditors. In addition to the convenience that this option provides, a debt management plan typically lowers credit card interest rates, waives late and over limit fees and stops collection activity. It can be a great tool for some people to help them save a lot of money and get out of debt faster.
If your debt is severely delinquent, debt settlement may be an option. Whereas in a debt management plan, you pay off your entire debt over time, debt settlement involves creditors forgiving a portion of your debt. The obvious advantage to this would be the cash savings. The disadvantage would be the fact that your credit report will show that the debt was paid for less than the agreed amount, which would likely lower your credit score. Additionally, you’d want to consult a tax professional because you would likely pay taxes on the forgiven amount as revenue. If you are interested in this option, you could try your hand at communicating directly with the creditors. Debt settlement companies often charge high fees and offer no guarantees.
Do you have a car that you could sell for some quick cash? How about stocks or bonds that have significant value? Selling or liquidating an asset allows you to pay off your debts quickly and easily. The toughest part of this option is breaking the emotional tie that you may have to your possessions. However, your sorrow may turn to joy when you realize how good it feels to be debt free!
Debt Consolidation Loan
Some people opt to eliminate the hassle of paying several creditors by getting a debt consolidation loan that covers all of their debts. If you have equity in your home, you could take out a home equity loan to repay unsecured creditors. Just beware that if you don’t pay your home equity loan, you could find yourself evicted since a home equity loan is secured by your house.
With any option you choose — including bankruptcy — you’re going to have to make some lifestyle changes. Remember that saying, “If you keep doing what you’ve always done, you’ll keep getting what you always got.” Lifestyle changes often require making small sacrifices now to avoid big problems later. For example, selling your motorcycle may give you enough cash to pay your mortgage and avoid foreclosure. Keeping a tighter rein on spending can also help you avoid bankruptcy. Start by tracking your expenses and creating a budget. You may find that you have more disposable income than you realized.
Some people with limited assets and no financial means to pay their debts are deemed to be “judgment proof.” This means that anyone who sues you and obtains a court judgment won’t be able to collect from you simply because you have no assets that they can legally take. A person is typically not thrown in jail for failing to pay debts, except in legal situations (e.g., failing to pay child support). Nor can a creditor take away essentials, such as basic clothing, ordinary household furnishings, personal effects, food, Social Security, unemployment, or public assistance benefits. You should definitely seek legal counsel if you are wondering if you’re judgment proof.
Only you can decide what course of action you should take. Explore your options and consult a professional when possible. There are many bankruptcy alternatives. While bankruptcy may be a good choice for some people, it certainly isn’t the only choice for most.
Disclaimer: This article is not to be used for legal advice. Speak with an attorney if you have specific questions about your situation.
Bankruptcy lawyers as well as bankruptcy alternatives are sought by millions of Americans every year. The goal of our bankruptcy alternative is to not only provide financial relief but also to relieve the everyday stress and anxiety that comes with being overwhelmed with debt. More specifically, the goal of National Debt Relief Group is to provide our clients with an affordable payment program and help them get them out of debt on the accounts they enroll as quickly as possible. A consumer who enrolls in our debt relief program may be able to settle their debts for less than they actually owe, all while preventing the harsh consequences of a bankruptcy filing. If the following statements apply to you, then you may need to seek an alternative to bankruptcy:
You don’t have any savings.
You lose sleep thinking about your debt.
You make minimum payments on your credit cards.
You get calls from debt collectors.
You’re afraid to look at your statements each month.
On the same token, you have no idea how much you owe.
You use credit cards for things you should buy with cash, such as groceries, gas, or utilities bills.
Your debt is putting an added stress on your marriage.
Your credit card debt to income is at or near 20 percent.
You have more than three major credit cards.
You lie to your spouse or other family member about your spending or hide credit card statements from family members.
After you pay your credit card bill, you increase your balance by the same amount (or more) the following month.
You’re at or near your credit limit on your credit cards.
You write a check hoping that you have enough time to make a deposit before it clears.
You take out cash advances on your credit card to pay other bills.
You’ve been denied credit.
You’ve bounced checks.
If you lost your job, you would have no ability to make your bills.
Debt Settlement as one of the Bankruptcy Alternatives
In our debt settlement program, negotiators work with creditors to lower the amount that a client owes. This may be an appropriate debt relief option for consumers who are overwhelmed with their minimum payments or who have already fallen behind on their bills. Our solution also works well for consumers who do not own a home, lack the equity or credit necessary to be able to refinance or get a second mortgage that can no longer afford their debts. In some cases, it is the fastest and least expensive way to getting out of debt besides bankruptcy, assuming that the client successfully completes the program and their accounts are settled.
Credit Counseling as a Bankruptcy Alternative
This type of bankruptcy alternative involves working with creditors to lower interest charges. The average client of a credit counseling program is able to be debt free in as little as 5 years. Credit counseling is considered a safer but more expensive option than debt settlement because you do not have to become past due in order to realize the benefits of this type of program. You pay back all of what you owe over a longer time period.
Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, a consumer is freed of their unsecured debt obligations (credit cards, medical bills, repossessions), but in exchange they are ordered to turn over certain non-exempt property to the courts to be sold and paid to the creditors. For consumers without any income or assets, this is an ideal debt relief solution. Since the credit implications can be severe, however, this option is considered a last resort for most consumers. Since National Debt Relief Group is not a law firm, one should counsel a bankruptcy attorney for advice about this option.
Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy, a consumer is put on a payment plan in which all of their disposable income is turned over to the courts for up to 5 years (or until the debt is paid back in full, whichever is first). For consumers who have fallen behind on their secured debts (automobile loans, mortgage loans), this may be appropriate debt relief solution. Of course, one should seek the advice of a qualified attorney before making any such conclusions, however. For consumers with credit card debt, this option may make very little sense. After all, there are numerous debt relief options available that will not only affect your credit less negatively, but you may also pay far less as a total cost.
Liquidating your Assets as an Alternative to Bankruptcy
For consumers who own a lot of personal property, asset liquidation may be an appropriate alternative to bankruptcy. In fact, this may be exactly what happens in a Chapter 7 bankruptcy depending on your state’s exemptions and what property you own, minus the severe credit impact. In other words, if you do not qualify for a bankruptcy alternative program like debt settlement or credit counseling and you own a lot of assets, it may be foolish for you to not sell it off on your own in order to pay back the creditors rather than file bankruptcy. As always, speak with an attorney if you need legal advice about your situation.
Struggling with debt can be frustrating, stressful, and depressing. If you feel like debt is sucking away your money and happiness month after month, it may be time to look for options to get rid of it once and for all.
As you look for options to get out of debt, you’re likely to run into bankruptcy sooner or later. This is one of the most effective solutions for getting out of debt and obtaining a fresh financial start. Still, it can also have negative consequences that you should know about.
For example, after a bankruptcy filing, you will lose all your credit cards, your credit score will be heavily affected for the next few years, it will be more challenging to get mortgages and loans, etc. Furthermore, you may have to sell some of your assets to get your debts discharged through this process.
However, in some cases, you may be able to opt for another debt relief option and avoid filing for bankruptcy in 2021. Read on to learn about the main alternatives to bankruptcy.
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A debt settlement consists of reaching an agreement with all your creditors to pay less money than you owe to clear your debt. If you don’t have many creditors and can still come up with the money to pay them all, this may be a practical option.
However, you may be wondering: Why would your creditors accept less money than you owe to settle the debt? The answer is simple. If you are in default, your creditors are more likely to accept a debt settlement. If you file for bankruptcy, they run the risk of receiving nothing at all.
You are free to use a debt settlement company or reach an agreement on your own with each of your creditors. However, keep in mind that this alternative could harm your credit score, although less so than bankruptcy.
On the other hand, you could try debt consolidation if your financial situation allows you to do so. Through this method, you can group your debts to reduce the amount of interest you have to pay.
You can consolidate your debts in different ways. The most common method is to take out a debt consolidation loan, which combines several separate debts into one loan. The debtor will have to pay the same amount of money but will reduce the interest rate. This option is usually available to those with a good credit score.
However, if you are considering bankruptcy, you may not be in a position to pay all of your debts in one lump sum. So, you may need to consider other options.
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Borrow money to pay off debt
Asking friends and family for money might not be pleasant, but it is an alternative to pay your debts in case of an emergency. If someone you know is willing to lend you money, it may be an opportunity to rebuild your finances without dealing with various creditors.
However, this should be one of your last options. Borrowing money is often uncomfortable, especially if you have had debt problems in the past. Should you choose to go this route, treat it like a bank loan. Do everything possible to pay off your new debt in the shortest time possible.
Find a way to earn more money
Earning more money can help you pay off your accumulated debts. Getting a second job, or finding another way to make money, may keep you from going bankrupt.
Today, there are many ways to make money in your spare time. The gig economy has prompted the growth of rideshare apps, such as Uber and Lyft. Plus, the COVID-19 pandemic has increased our reliance on delivery services. You can try to earn a few extra dollars through these methods, any other alternative that allows you to make additional income.
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Change your lifestyle
If your lifestyle makes you spend more than you can earn, maybe it’s time for a change. You might be surprised at what a little planning and budgeting can do for your finances.
Creating a monthly budget can help you reduce your expenses. Then, you could put the extra money toward paying off your debts.
Plus, learning to live on a budget will help you avoid debt in the future, preventing you from being at risk of bankruptcy later on.
Sell some assets
Selling some assets to pay off your debts may be a good idea. Sell some things you don’t use or a non-essential asset for which you could get good money, such as a stamp collection. You can do this through a garage sale or by posting your stuff on eBay, Craigslist, etc.
Keep in mind that while you may have to sell some assets during bankruptcy, doing it on your own allows you to stay in control of the situation at all times.
However, in some cases, you may be able to obtain a debt discharge through bankruptcy without selling anything at all. Consult a local bankruptcy attorney for more information.
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Don’t do anything
Doing nothing is a decision as well. Simply put, if you have nothing to lose, then the debt collectors won’t be able to take anything from you. If you don’t have any expensive assets, and your only income is through social security or disability benefits, you could choose to do nothing.
Since your income is protected, there is nothing your creditors can do to collect your debt. However, they may continue to contact you and send you letters.
Sometimes bankruptcy is your only option
Sometimes, bankruptcy will be your only choice to get rid of your debts and regain control of your life. However, this won’t spell the “end” of your financial life. Although bankruptcy has disadvantages, it also has many benefits that will help you eliminate most of your debts and recover your peace of mind. After the process, you will be able to rebuild your finances from scratch.
However, filing for bankruptcy can be more complicated than it seems. That’s why working with a Los Angeles bankruptcy attorney, such as KT Bankruptcy Lawyer, might be your best option if you want your filing to be a success.
Filing for personal bankruptcy is a serious decision, one that should be made after careful consideration and, if possible, with the advice of a lawyer. Entering into bankruptcy can help to alleviate your debts, but it will also affect your credit rating and your ability to borrow money in the future. So while it can be a good option for those who need it, personal bankruptcy should be a last resort after other alternatives have been exhausted. With that in mind, let’s first consider a few alternatives to filing for bankruptcy.
The most basic alternative to filing for bankruptcy is to simply do nothing. If you owe money to creditors but have a small (or no) income, you may be considered judgment proof — also called collection proof. Being judgment proof means that creditors would have nothing to take from you if they decided to sue you in court. Also, in some cases, creditors may decide to simply write off your debt rather than pursue repayment, and in seven years, that debt would be erased from your record. Still, keep in mind that if your financial condition does improve, you may no longer be considered judgment proof and creditors may approach you once again for repayment of debts.
A second possibility is to negotiate with creditors and to work out an individual payment plan. However, this process can be daunting, especially when dealing with creditors who are particularly aggressive or intimidating.
Instead of personally negotiating with creditors, you can contact a debt management agency for help. These agencies are nonprofit entities, and a listing of them can be found on the United States Trustee’s Web site. Working with an agency means that no bankruptcy will appear on your record. But there is a drawback to working with a debt management agency: you won’t have the protections provided by Chapter 7 or 13. Namely, agencies often require debts to be paid in full, and they can cancel your plan if you fall behind on payments. Another common concern related to debt management agencies is that they are heavily funded by creditors, a situation which may produce a conflict of interest for the agency.
You’re now aware of some of the alternatives to filing for bankruptcy. But you might still be thinking about filing, so let’s consider the various possibilities for personal bankruptcy. We’ll also look at the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 and how this "new" law affects individuals filing for bankruptcy.
Individuals are eligible to file for bankruptcy under Chapter 7, 11, 12 or 13. As discussed earlier, Chapter 11 usually applies to businesses, but it can apply to individuals with extremely large debts, such as someone whose debt exceeds the limits for filing under Chapter 13 (according to Findlaw.com, secured debts must be less than $922,975 and unsecured debts less than $307,675).
A Chapter 7 filing means that the debtor has no hopes of paying off his or her debts and is looking for a fresh start. Now, as a result of the Bankruptcy Abuse Prevention and Consumer Prevention Act of 2005, the debtor must take a Means Test in order to qualify for protection under Chapter 7. If your current monthly income (which is actually your average monthly income for the six months prior to filing) is greater than the median income for a family of the same size in your state, you generally can’t file for Chapter 7. Here’s an example of how the Means Test works. In 2005, the estimated average yearly income for a four-person family in Georgia was $64,427. That translates to an estimated average monthly income of $5,368.92. So, if your average monthly income for the six months prior to filing for bankruptcy was greater than $5,368.92, you aren’t eligible to file for Chapter 7 and will probably have to file under Chapter 13 [ref].
After filing, the debtor is assigned a court-appointed trustee. The trustee will organize the sale of the debtor’s assets. The debtor may be allowed to retain certain items, such as a house or part of the value of a car, based on exemption laws, which can differ drastically from state to state. Any non-exempt assets are sold by the trustee and used to pay off a portion of the filer’s debts. Because the debtor cannot afford to pay off all of his or her creditors, some debts may be discharged and will not have to be repaid.
Both Chapter 12 and 13 are designed to help an individual with a regular income to restructure his or her debts. The main difference is that Chapter 12 is designed for farmers. These types of filing can be more favorable for the debtor than Chapter 7 because it allows the filer to retain most (or even all) of his or her assets and to form a plan to repay debts over a period of several years. Unlike someone who files for Chapter 7, a Chapter 13 debtor is not immediately discharged from his or her debts. Like Chapter 7 filers, the debtor is assigned a trustee, with whom the debtor must form a repayment plan. The court either approves the plan or orders changes. Once the plan goes into effect, the debtor has three to five years to repay his or her debts, and frequently the debtor only has to repay 30 to 50 cents on the dollar.
If a business or individual goes through bankruptcy successfully, many of their debts are legally discharged. Creditors no longer have any legal right to collect on those debts. However, the moral obligation to pay those debts remains. This might seem inconsequential — if the law says the debt is forgiven, why would anyone pay it? There are certainly situations in individual bankruptcies where the moral obligation is important. If your parents loaned you money, you would probably feel a responsibility to pay them back, even if your parents "discharged" the debt. It can be even more important for business owners. If a business goes through Chapter 11, it would probably want to make some good faith payments toward debts if they ever wanted to use the same suppliers once the reorganization is complete.