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Alternatives to Filing Personal Bankruptcy



Bankruptcy is the legal declaration of inability or impairment of ability to pay creditors. Bankruptcy is a legal process initiated by a filing by the debtor that discharges debts while making it more difficult for an individual to borrow money. To avoid negative impacts of filing bankruptcy like repairing your credit, individuals in debt have several alternatives:

  • Take no action
  • Self money management
  • Negotiate with creditors
  • Debt consolidation

Take No Action

While filing bankruptcy prevents creditors from obtaining a judgment against an individual, and garnishing wages or seizing property, debtors without income or assets are considered "judgment proof" because a judgment would have no impact on their financial conditions. This may include people who are retired or otherwise unemployed, who don't own property.

Creditors are unwilling to initiate legal action against a debtor without assets because it is unlikely they will collect. If a debtor does not expect to have a steady income that could be garnished or possess property of value that a creditor could seize, this approach may be appropriate. A judgment is not a permanent adverse fixture on a credit report, as it is typically removed from a debtor's credit report after seven years in most jurisdictions.

Self Money Management

To reduce debt, monthly spending must be reduced to allow for extra cash to pay debt. The most obvious way to accomplish this aim is through creation of a personal budget and analysis of expenses to identify areas for reduction. The starting point is to write down and capture all monthly expenses in diary form.

Negotiate with Creditors

Most creditors are willing to negotiate settlements to receive a portion of the money owed to them instead of facing the risk of receiving little or nothing in bankruptcy. If a debtor has sufficient income or assets that can be liquidated to proceeds to apply to debt, negotiation is a viable alternative. Negotiation may also provide the debtor with more time to rebuild his or her financial situation.

Debt Consolidation

Consolidation usually involves borrowing sufficient funds at a low rate of interest from one lender to repay a number of higher interest rate debts. This approach is often applied to high credit card balances. With debt consolidation, a debtor replaces many payments to different creditors with one monthly payment to a single creditor. This approach is a major simplification tool for a debtor's monthly budget. The lower interest rate translates into more of the debtor's monthly payment being applied against the loan principal, which results in faster debt repayment.

Prior to filing for personal bankruptcy, a debtor should prudently and extensively consider all viable alternatives.