Alternatives to Chapter 7 Bankruptcy


Before filing a bankruptcy petition, you should consider the following as practical alternatives:

Do nothing. In some cases, doing nothing is an appropriate alternative to bankruptcy. To collect on a debt, a creditor must usually sue you, obtain a judgment, and then try to collect on that judgment. A judgment creditor can try to collect on a judgment by garnishing your wages or your bank account. However, some people are “judgment proof,” that is, they don't have any income or property to garnish, or their income is beyond a creditor's reach because it is exempt, such as social security, unemployment benefits, or public assistance. As a result, creditors do not have any way of legally collecting their judgments. Bankruptcy is not necessary if you are “judgment proof.”

Negotiate. You or your attorney may be able to negotiate an agreement with your creditors. Such an agreement is commonly known as a “workout” agreement. A creditor may be willing to permit you to renegotiate repayment terms (like stretching out the number of months for repayment), or it may reduce the interest rate to lower your payment amount, and it may even be willing to “discount” or reduce the amount that you owe. Creditors are usually willing to negotiate if they believe that you are a viable bankruptcy candidate and they believe that they will receive more under the terms of the workout agreement than they would receive in a bankruptcy.

You may be able to take advantage of consumer protection laws to stop creditors who are harassing you (without having to file bankruptcy). An attorney practicing consumer law can help you determine what you may be able to do to stop creditor harassment.

Another alternative to Chapter 7 bankruptcy is to work with a credit counseling organization. The creditor counselor can negotiate a repayment schedule with your creditors. You usually make one monthly payment to the credit counseling organization, and then the credit counseling organization makes the payments to your creditors. There are many nonprofit credit-counseling organizations. The biggest is the National Foundation for Credit Counseling.

Of course, filing a Chapter 13 bankruptcy is also an alternative to filing a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, you propose a plan to pay your debts, usually over a period of three to five years. To file a Chapter 13 bankruptcy, you must have a regular income, and you must have enough disposable income to make your Chapter 13 payments. An experienced bankruptcy attorney can evaluate your financial condition and let you know whether Chapter 13 is a viable alternative for you.

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