Are There Alternatives to Bankruptcy?

Are there alternatives to bankruptcy? In a word, yes. When faced with mounting debt, looking toward bankruptcy as a solution is not uncommon. However, before heading down the bankruptcy road, you owe it to yourself to explore the alternatives to bankruptcy which may serve you just as well.

You need to assess your situation and look at what you are trying to achieve.

  • Situation #1: You are receiving constant phone calls from bill collectors and creditors. Your initial response should NOT be, well I’ll just file for bankruptcy. That will stop the phone from ringing! Instead, why not acquaint yourself with the new federal/state laws which were designed to protect consumers from harassment and abuse.

  • Situation #2: You owe money and you have an income and some assets. Instead of filing for bankruptcy, try to enter into negotiation talks with your creditors. Negotiating with your creditors opens the lines of communication, buys you some time, and often a creditor may agree to pennies on the dollar to settle a debt. You don’t know if you don’t ask!

  • Situation #3: You owe money but you just do not feel confident with the negotiating process. Instead of filing for bankruptcy, why not secure the services of a debt counseling agency or a non-profit credit counseling group. These entities work with people every day to help secure workable repayment plans. They can also teach budgeting skills, etc. to help improve your future financial status. A web search will lead you to state by state, trustee approved lists of credit counseling agencies. This “pre-bankruptcy” counseling is now required before filing for bankruptcy anyway so go ahead and see what they can do for you! If you choose this option, you most likely will enter into a debt repayment plan to help manage your current debt load. You will be paying your creditors over time. The advantage here is that even though it clearly resembles a Chapter 13 Repayment Plan, this is an arrangement with no bankruptcy reporting implications. Your credit report will not reflect a bankruptcy filing! In fairness, it should be noted that there are disadvantages to this route. Say you miss making a payment. If you had filed for Chapter 13 protection, creditors could NOT initiate collection proceedings. Debt management programs do not have such safety nets. Non-payment could trigger a creditor asking for the plan to become null and void. Another disadvantage is that debt management plans require that debts be repaid IN FULL, whereas Chapter 13 repayments usually require only a percentage of unsecured debt to be repaid. You should also be aware that there are “scammers” out there. These companies take your money as “fees for service” and do not follow through with debt repayment. An ancillary to this is the fact that many credit counseling agencies receive a lot of their funding from creditors themselves. This can pose a serious conflict of interest. So, as always, it should be buyer beware and aware.

  • Situation #4: You live very simply. Your income is small. You do not own an appreciable amount of property. Believe it or not, it may be in your best interests to do nothing rather than file for bankruptcy. You are, essentially, what is considered “judgment proof”. This means that even if court proceedings were initiated and a judgment was entered against you, you do NOT have anything that could legally be taken to satisfy debts! You do not face jail time (this does not include not paying your income taxes or child support!!!). The courts cannot take away any unemployment compensation, Social Security, or public assistance. Your personal effects are also judgment proof. So, stop and think and make a wise decision.

As always, it is best to obtain professional assistance so you can make the best decision for YOU.

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