Are There Alternatives to Bankruptcy?

Bankruptcy law aims to give people with debt problems a fresh start, putting them on the path towards debt relief.

“Bankruptcy is a legal mechanism to address your debts,” says Ronald Sykstus, a bankruptcy attorney at Bond & Botes Law Offices in Huntsville, Alabama. “The bottom line is that bankruptcy gives a great deal of protection so that you don’t lose everything you’ve got.”

However, filing for bankruptcy is generally considered a last resort. It isn’t always the best option. “Every situation is different,” says Skystus. “The income is different, the expenses are different.”

Because of this, it’s essential to carefully consider your financial situation and weigh the bankruptcy alternatives. This article will cover alternatives to bankruptcy and when declaring bankruptcy makes sense. Once you’re familiar with the options, speak with a bankruptcy attorney about your situation.

Is Bankruptcy Your Only Option?

While clients initially assume bankruptcy is the only recourse, bankruptcy attorney Scott A. Wolfson says non-bankruptcy solutions are feasible in more than 90 percent of cases.

If a situation is left to fester, though, bankruptcy may be the only viable option. In Chapter 7 bankruptcy cases, debtors agree to a liquidation of their assets to pay off creditors. Chapter 13 bankruptcy is for debtors who do not qualify through the means test used in Chapter 7. In a Chapter 13 bankruptcy, debtors propose a repayment plan that will run for 3-5 years.

By the time the company contacted Wolfson, its cash-flow issues had reached critical mass. “The CEO walked me around his facility, then described the company’s unsuccessful negotiations with its lenders over the past three years. Things had progressed irreversibly. He was [going to lose] control to his lenders.”

It’s also important to consider that some debt is not dischargeable through bankruptcy. Student loans, alimony, outstanding taxes, and child support are not dischargeable.

Debt Consolidation: Pros and Cons

Debt consolidation means you bring all your debts under a single payment to one creditor instead of having multiple payments to different creditors. There are various methods for consolidating debt, including obtaining a debt consolidation loan and transferring credit card debt to a card with a lower interest rate.

By consolidating debt, you can avoid bankruptcy by making it easier to pay off your debt. Some lenders will use your home equity to give you a loan with a lower interest rate. Depending on the type of debt you have, a credit card company may let you transfer your unsecured debts onto one credit card. That credit card typically offers a promotional interest rate for a specified period. Debtors can achieve faster debt payoffs, which improve their credit scores.

There are drawbacks to refinancing, though. There may be additional fees on the new loan, which would increase the total debt owed. Many consolidation companies require good credit. So, if you are already in financial trouble, you may not be able to get approved for personal loan consolidation.

There will be a short-term dip in your credit score, similar to any other time you seek financing. There is also a risk of debtor abuse. For consolidation to be successful, the debtor must not continue to spend and focus on paying down their debt.

Working with a Credit Counseling Agency

For help with a debt management plan that avoids bankruptcy, you have a couple of options:

• Credit counseling agency. A credit counseling agency will help you assess your credit report and budget, and create a debt management program for paying off debts.
• Debt settlement company. Whereas credit counseling agencies advise you on your financial situation, debt settlement companies act as intermediaries with your creditors to arrange debt settlement.

Whether you go through a nonprofit credit counseling agency or a debt settlement company, it’s important to realize that there are disadvantages to debt management plans. For example, if you miss a payment, any of your creditors can withdraw from the plan.

Negotiating Debt Settlements with Creditors

Try contacting your creditors directly to negotiate a repayment plan. They may be open to a monthly payment plan that eliminates your debt without further legal action. Sometimes, creditors will require a lump sum payment as part of agreeing to reduce the total amount that you owe.

Direct negotiations with a creditor can restructure payment obligations and ease the financial crunch through a repayment plan. Landlords are often open to these agreements and may temporarily accept reduced rent or add skipped monthly payments to the end of the lease.

Some secured creditors, such as banks, may require more intense discussions. “The bank may forbear from enforcing its rights while the business works to restructure, or it may insist on a quick-sale process to monetize its collateral,” says Wolfson. “We examine the bank’s collateral position to determine whether a bankruptcy filing could impact it negatively, and if so, use that to our negotiating advantage.”

“There is a lot of leverage and negotiating power before the lawsuits are filed or the vehicle is repossessed,” adds Leigh Dones Moss. “My goal is for them to maintain control of the outcome.”

When Is a Bankruptcy Alternative the Right Choice?

“If your credit report looks great and you may have one debt, then I don’t really think bankruptcy is the correct option,” says Sykstus. “However, if you’ve got seven collection letters, a lawsuit, and you’re behind on your car or your house, then it makes a lot more sense.”

The purpose of bankruptcy law is to provide individuals with debt a legal, court-administered process to address and eliminate their debts. “Bankruptcy is an alternative to doing nothing and getting collected on,” says Sykstus.

“If debt collectors are writing, calling, or suing you, or maybe you’re in danger of being behind on your house or car payments, or you’re going to lose those items, bankruptcy comes in with this big umbrella of protection called the automatic stay. Once a bankruptcy is filed — the very moment it’s filed — you have this protection called the automatic stay, which stops every creditor from suing you.”

While creditors can circumvent an automatic stay to collect, they must still go through the bankruptcy court. This gives the debtor a degree of protection and peace of mind.

Holistically Determining Your Company’s Best Path Forward

In the end, the business owner’s debts, assets, and long-term goals converge to define the best path forward.

For companies that remain open, Moss strongly recommends putting a business continuity plan in place to keep them from facing similar predicaments in the future. “What will I do if my IT goes down? What if there is a fire? A pandemic?” says Moss.

“I like to see business owners think about these things in advance and apply for a line of credit now, so if there’s a financial crisis, you have a financial net.”

Comparing the Costs and Long-Term Impact

If you’re thinking about bankruptcy, “Do your research. Know what your debts are and who you owe,” says Sykstus. “Knowledge is power. At least, it will make you feel a little more in control to kind of get started on what your approaches can be.”

Once you understand your financial situation, consider speaking with a bankruptcy attorney. An experienced attorney will be well-versed in bankruptcy law and your state’s exemptions. They will be able to talk you through your options with sound legal advice.

For help with your bankruptcy questions, look for a bankruptcy lawyer in the Super Lawyers directory.