Alternatives to Bankruptcy

Explore alternatives to Chapter 7 or Chapter 13 bankruptcy before you file.

By , Attorney · University of the Pacific McGeorge School of Law

If you are struggling with debt, bankruptcy might be a good option, but before you file, consider exploring alternatives to bankruptcy. In some situations, another course of action might be your best remedy. This article explains that the main alternatives to bankruptcy when dealing with debt issues include:

  • doing nothing
  • selling property
  • negotiating with creditors, and
  • using a credit counseling agency.

However, keep in mind that most people rebuild credit reasonably quickly after bankruptcy. You'll find information about the effects of bankruptcy at the end of the article.

The Easiest Bankruptcy Alternative? Doing Nothing

Surprisingly, the best approach for some people in debt is to take no action. If you're living with little income and property and don't anticipate that much will change in the future, you might be "judgment proof."

If you're judgment proof, anyone who sues you and obtains a court judgment won't be able to collect from you because you don't have anything they can legally take. Most states protect or "exempt" essential property like basic clothing, ordinary household furnishings, food, Social Security income, unemployment, or public assistance benefits.

Selling Property as an Alternative to Bankruptcy

If you own significant property and assets, you might not be bankrupt. Consider selling your property and paying off debt, especially if you'd lose property in Chapter 7.

An easy way to determine whether a private sale would be better than filing for Chapter 7 bankruptcy is by comparing the total debt you could erase in Chapter 7 to the amount of property you'd lose. You can check potential property loss by reviewing your state's bankruptcy exemptions.

Avoid Bankruptcy By Borrowing Money From Friends and Family

This approach will likely make sense if a relatively small loan will help you get by financially. But if you anticipate needing help on an ongoing basis, many friends and family will help but would prefer you use the money to pay for bankruptcy and stop the problem for good.

Find out how people file for bankruptcy when they can't afford to hire a bankruptcy lawyer.

Avoid Bankruptcy By Negotiating With Creditors

If you have some income, you might be better off negotiating with your creditors instead of filing for bankruptcy. Negotiating more favorable payment terms can buy you some time to get back on your feet, or your creditors may agree to settle your debts for less than you owe.

Many people aren't comfortable negotiating with their creditors or with collection agencies. If you aren't confident with your negotiation skills, or the creditors and collectors are so hard-nosed that the process is too unpleasant to stomach, contact an attorney for help.

Otherwise, start by learning more about debt settlement and negotiating with creditors.

Use a Credit Counseling Agency As an Alternative to Bankruptcy

If you don't want to do the negotiating yourself, another alternative can be seeking help from a nonprofit credit or debt counseling agency. These agencies can work with you to help you repay your debts and improve your financial picture.

You can find agencies in your area on the United States Trustee Program website. Clicking "Credit Counseling and Debtor Education" will lead you to a list of approved agencies that provide the credit counseling debtors must complete before filing for bankruptcy.

Debt Counseling vs. Chapter 13 Repayment Plans

Participating in a credit or debt counseling agency's debt management program is a bit like filing for Chapter 13 bankruptcy. The agency will help you develop a plan to repay your creditors over time, somewhat like a Chapter 13 plan.

But working with a credit or debt counseling agency has one advantage: No bankruptcy will appear on your credit record. However, successfully finishing the plan won't necessarily improve your credit. You should discuss this with the counselor before agreeing to the program.

Disadvantages of Debt Counseling

A debt management program also has some disadvantages when compared to Chapter 13 bankruptcy.

Chapter 13 protects you from creditors who would start collection actions. A debt management program has no such protection. Any single creditor can pull the plug on your plan.

A debt management program usually requires you to repay your debts entirely. In Chapter 13 bankruptcy, you often pay only a small fraction of your unsecured debts. Finally, debt management and debt settlement scams abound. Many companies don't care about helping you; they want to collect fees for their services. So tread carefully before you sign up for a plan.

Consumer advocates have also raised concerns about credit counseling agencies. Why? Because they receive most of their funding from creditors. As a result, critics say, these agencies could face a conflict between their funders' and clients' interests.

Can I Stop Creditor Harassment Without Filing for Bankruptcy?

Yes, it's possible. If you decide to do nothing, or you're resolving debt problems without bankruptcy, you'll likely want the creditor abuse to stop. You can get creditors off your back by taking advantage of federal and state debt collection laws that protect you from abusive and harassing debt collector conduct.

In many cases, asking the creditor to stop calling is all you'll need to do. To learn about the specific process, read What to Do If a Bill Collector Crosses the Line. But remember, this approach won't resolve the debt itself.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

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Helpful Bankruptcy Sites

Department of Justice U.S. Trustee Program

United States Courts Bankruptcy Forms

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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