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Alternatives to Filing Bankruptcy

Debt Management (Credit Counseling)

Credit counseling requires 100% repayment of your debt. Positives are that you could avoid bankruptcy, it is less likely that you will be sued, and you might obtain a good credit score. The negatives are that it is the most expensive option, there is no automatic stay as in bankruptcy, so you could be harassed or sued by your creditors, and you might not obtain a good credit score.

Debt Settlement (Debt Negotiation)

Debt settlement is where you negotiate with your creditors to pay less than the full amount owed on your debt. Positives are that you could avoid bankruptcy, and it is usually less expensive than debt management or Chapter 13. Negatives are that your credit score will be poor, creditor harassment and lawsuits are more likely than with debt management, there is a low rate of completion, and cancellation of debt can be “imputed income” but not if you are insolvent.

Important Consideration About Non-Bankruptcy Alternatives

There is no requirement that all of your creditors agree to debt management or debt settlement, but most of them must voluntarily support it for it to work. Creditors that do not agree to the workout are not affected by it and remain entitled to pursue other remedies to collect the debts owed to them. Although they can theoretically proceed to recover the full amount due, they forfeit the right to benefit automatically from whatever partial payment the composition would have allowed had they taken part.

You should be aware that the credit counseling industry is under national scrutiny for deceptive advertising and charging excessive fees. In many cases, people who want to avoid bankruptcy may sign up for a debt repayment plan at the credit counseling office, only to find themselves scrambling to pay the associated fees, on top of a burdensome debt load. I urge my clients to listen carefully, ask many questions, and think about the financial implications of signing on to a debt repayment plan.

Bankruptcy alternatives

Chapter 7 — Chapter 7 bankruptcy does not involve the filing of a plan of repayment. The Bankruptcy Code will allow the debtor to keep certain “exempt” property; but a trustee will liquidate the debtor’s remaining assets. It is important to speak with an experienced bankruptcy attorney to determine whether your assets are “exempt” property.

Chapter 11 — Filing for bankruptcy under Chapter 11 may be an option for debtors such as corporations, sole proprietorships and partnerships that are engaged in business. These debtors may wish to stay in business and avoid liquidation. Under Chapter 11, the debtor can have debts reduced or have the time for repayment extended.

Chapter 13 — Chapter 13 may be an option for individual debtors with regular income. Chapter 13 allows individual debtors to save their homes from foreclosure by coming up with a payment plan for past due payments. Sole proprietorships may also be eligible to file for Chapter 13.

Speak to a bankruptcy lawyer

Non-bankruptcy alternatives such as debt management and debt settlement have several benefits. However, in some circumstances, a debtor is afforded greater protection by a formal bankruptcy, and attempting a workout may just prolong the financial agony and delay the inevitable. An attorney who has experience in bankruptcy and debtor-creditor law can help both debtors and creditors determine whether a workout is the best option for debt repayment, or whether bankruptcy is the better choice in their particular circumstances. Call today to schedule a consultation.