Finding a Bankruptcy Alternative

You may feel that filing a Chapter 7 bankruptcy or a Chapter 13 bankruptcy case is your only way out. The truth is that you may have other ways to pay off your debts. For example, if debt collectors are calling you night and day, talking to a debt relief or debt settlement company might provide a path to a solution. Each case will be different, as it depends on your financial situation. Only you know what is best for you and your family.

This article examines some of the alternatives to bankruptcy. It also explains how these bankruptcy alternatives can help solve your debt problems. If you still believe bankruptcy is the best solution, consider discussing it with a bankruptcy attorney before taking that step.

Alternatives To Filing for Bankruptcy

If you are struggling with debt but don’t want to file for bankruptcy, you have options. Some people are afraid that filing for bankruptcy will ruin their credit score. Others believe that they have too much pride to file a Chapter 7 bankruptcy.

Consider the options below if you want to avoid bankruptcy at all costs.

Debt Consolidation

One bankruptcy alternative is to combine your debt in order to pay it down. Sometimes, it’s easier to repay your debt when you only have to make one payment per month instead of keeping track of multiple payment plans.

Some debt consolidation options include:

• Debt consolidation loan: Debt consolidation combines secured and unsecured debts into one loan. With this type of loan, a debtor still owes the same amount but enjoys a lower interest rate and monthly payment.
• Transfer debt to a low-interest credit card: Some credit card companies offer low transfer rates to new customers. When the transfer terms offer a lower long-term interest rate during repayment, you’ll pay less interest overall.
• Home equity line: If you have equity in your home, a home equity loan or line of credit is an excellent way to consolidate your debt. You can secure a loan with a low interest rate, which may be tax-deductible. Be cautious when securing a loan against property because if you default on the equity line, the lender may repossess your property. This is an effective option in a strong real estate market.

For more information on these alternatives, see  FindLaw’s Debt Negotiation Programs and Bankruptcy v. Credit Counseling: What is the Right Choice For You? articles.

Negotiate a Repayment Plan with Your Creditors

Another bankruptcy alternative is to ask creditors for a repayment plan. Many creditors will do this if it helps the debtor avoid bankruptcy. Creditors are aware that they may receive nothing if the debtor files a Chapter 7 bankruptcy case. Chapter 13 bankruptcy isn’t a much better hope, as the creditor will likely only receive a portion of the debt.

When you tell a creditor that you’re considering bankruptcy, they may offer the following options:

• Lower monthly payment
• Long-term repayment plan
• Reduction of the interest rate
• Settlement for less than the total amount

These options are better for the creditor and are also a possible solution for a debtor trying to avoid bankruptcy.

Create a Debt Management Plan

If you’re having difficulty negotiating with creditors, a credit counseling agency can work on your behalf to create a debt management plan (DMP). Your credit counselor will contact the creditors and try to negotiate a fair repayment plan.

If the creditors agree, you will make one monthly payment to the agency. For a fee, the agency will disburse the money you give them among your creditors until you fully repay the debt. You can look for a nonprofit credit counseling agency if you cannot afford this fee.

A debt management program isn’t always ideal. For example, creditors can terminate the plan if you miss a payment. If you miss a payment under a Chapter 13 repayment plan, the trustee may help you relating to the creditor’s collection activities.

The other significant difference between a DMP and a Chapter 13 repayment plan is that, with a Chapter 13, you usually pay only a portion of the total owed amount, although debt management companies can negotiate a settlement with the creditors. This could save you thousands of dollars.

Default on the Debt

One option that some debtors resort to is defaulting on their debts. If you stop paying your bills, creditors will initiate collection efforts. While creditors can attempt to collect your debts, they must abide by the Fair Debt Collection Practices Act and other state laws.

Under these laws, creditors may not:

• Engage in abusive behavior, such as calling numerous times per day
• Use deceit to collect a debt
• Call during times prohibited by law

If a creditor violates this law, you can seek damages. Keep in mind that a financial institution can pursue debt collection activities for years. Not only will these collection activities show up on your credit report, but they can also be challenging to deal with. You will continue to receive letters and phone calls until the bank issues a charge-off or you repay the debt in full.

Don’t overlook that in addition to using collection agencies to recover a debt, many creditors take legal action against debtors. If they successfully sue you, they will receive a judgment and can use legal channels to collect.

If you have no assets or only have exempt property, you are considered “judgment proof.”  This means there is little to nothing a creditor can do to recover the money you owe them.

Some example of exempt properties include:

• Clothing
• Furniture
• Social Security benefits
• Public assistance benefits

In most instances, a creditor will not sue a debtor when it is impossible to collect the debt. Instead, the creditor may write off the debt as a business loss. The debtor may not have to pay, but the default may remain on the borrower’s credit record for up to seven years.

Learn About Your Bankruptcy Alternatives: Talk to an Attorney Today

Are you trying to avoid filing for bankruptcy? If you haven’t considered the possible alternatives, it might be a good idea to contact an experienced bankruptcy attorney for legal advice and guidance.

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• Refinancing Do’s and Don’ts
• Debt Negotiation Programs
• What is a Debt Management Plan (DMP)?