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Depending on your personal situation and the level of debt, there are alternatives to consider before applying for bankruptcy. If the consequences of liquidation have caused pause for a rethink, then the information below should help you answer the question: Is bankruptcy necessary?
Bankruptcy options include:
You may be wondering, “Why should I clear my debt?” After all, people with debt cannot be sent to jail and if there are no assets creditors are unlikely to sue. Naturally, for most people who consider themselves responsible citizens, doing nothing is the worst response to financial problems whether they own assets or not. It can also be a somewhat nerve wracking approach to solving your debt problems and resulting harassment from creditors could be incredibly stressful.
If you have property such as a house or a car, failing to make payments can result in repossession. Likewise, if your debt is in the form of student loans or back taxes, doing nothing is not an advisable approach – although these debts cannot be discharged through bankruptcy in any case.
However, if your debt consists of unsecured debts such as credit card bills and you have no assets and are considered ‘judgment proof’ – or less formally as ‘flat broke’ – you could consider stopping all repayments. It may sound extreme but the reality is creditors are unlikely to bring a lawsuit against you because you are considered ‘judgment proof’. Creditors instead will likely write off the debt. Failing to pay creditors after the statute of limitations has passed (four to 10 years) will automatically clear debt. For four to 10 years, however, you will be considered a high credit risk.
To conclude, if you have no assets and are flat broke, then not paying creditors may be one solution to debt. Breaching credit agreements will of course go on your credit report, but it probably won’t hurt any more than bankruptcy would. It should be noted however, that creditors would not stop harassing you, either by mail or telephone should you decide to stop repayments.
In some instances it may be advantageous to negotiate with your creditors, especially if you cannot repay debts in full. Creditors understand that not negotiating on a payment plan may mean they get nothing in return. As a result, it is in creditors’ interest to find an alternative arrangement. A creditor may do one of the following:
When making your plea to creditors, try sending a small sum to demonstrate your commitment to the debt. The creditor will be more inclined to make some allowances.
This is how credit counseling works: A reputable credit counseling service will examine your debts and your income and come up with a budget. Based on that budget, the counselor (in consultation with your creditors) will devise a repayment plan. In turn, you will pay your credit counseling agency once a month and the agency will distribute the money to your creditors, keeping a small percentage for the agency. Your credit counselor will probably be able to get some concessions from your creditors, such as waiving interest fees and late payments, lowering the minimum monthly payments, and the opportunity to reinstate your credit if you complete the debt management process.
Debt management is similar to filing for Chapter 13, only it does not appear on your credit report for 10 years. Unlike Chapter 13, however, missing a payment means your debt counselor can cancel the plan. In such circumstances, your debt counselor cannot discharge any of your debts and all your unsecured debts will have to be paid back in full.
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