Bankruptcy Alternatives - Think Twice!

A record number of Americans are filing for bankruptcy in 2009.  There are a variety of reasons, but the biggest are the fact that people accumulated serious amounts of debt, on top of which they lost their jobs, and also have no health care to cover expenses.  Many more Americans are working, but now that credit card companies are raising fees and interest rates, the minimum payments are no longer bearable for many people. They turn to personal bankruptcy for relief.

There are six types of bankruptcy which are all set out in the U.S. Bankruptcy Code, which is the federal law that provides for bankruptcy. It's important to note that there are also state bankruptcy laws, which may provide for options regarding what property you are permitted to keep within a bankruptcy.

Mainly, for individual debtors, the two main bankrtupcy types are Chapter 7 and Chapter 13. 

Chapter 7 is also called Liquidation, and is the type of bankruptcy where the court-appointed trustee takes your assets (property), may sell them to get cash, which is then used to pay off your creditors. Depending on the applicable law, you may be able to keep certain property.  In the case of secured creditors, who have property securing their debt, they can take back the asset, such as a car or a home. In most chapter 7 cases, you receive a discharge of your case the eliminates your debt, and prevents those creditors from coming after you for those personal liabilities.  A discharge can take place within just a few months after your petition is filed.  When new bankruptcy laws were passed, known as the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005, there was added a "means test" to determine if you can qualify for relief under Chapter 7. This test will determine if your income is high enough to qualify for bankruptcy under Chapter 7.  If not, then you will have to move your case to a Chapter 13 filing.

Chapter 13 is another type of bankrtupcy, called Adjustment of Debts of an Individual With Regular Income, which is meant for people who have regular income. Often, a debtor might prefer Chapter 13 to Chapter 7 because it might allow them to keep some valuable property, such as a home, and permits the debtor to build a repayment plan which repays creditors over a period of time, usually three to five years. For debtors who don't qualify for Chapter 7 based on the means test, they will also go to Chapter 13.

In Chapter 13, there will be a hearing where the bankruptcy court will approve or deny your repayment plan, based on the Bankruptcy Code's requirements.  Unlike Chapter 7, there is no immediate discharge of debts. You can only get the discharge once your complete the payments required by the repayment plan.  While you are paying according to the plan, creditors are stopped form suing you, contacting you, threatening you, or otherwise trying to collect on your debt.

When considering personal bankruptcy under Chapter 7 or Chapter 13 bankruptcy laws you will need more detailed information.  This is a good time to look for the help of a qualified bankruptcy lawyer or consumer credit counseling service, to gain professional advice about your options.

Here are your choices in a nutshell:

• Do nothing - just let the collectors call you and repossess your stuff!
• Get a second job to help pay the debts.
• Contact all your creditors and work out a plan without having to file for personal bankruptcy. 
• Go to a credit counseling service to get help managing debt.
• Contact a bankruptcy lawyer to find out about your options.
• Get a book from the library that explains the details of filing for bankruptcy.

So many people are thinking about bankruptcy today, what  might be good bankruptcy alternatives?  As a result of the economic downturn, job losses, and high medical expenses, not to mention divorce and just plain bad habits, many more people are looking for a way to manage overwhelming debt. Even so, it's hard to consider filing for bankruptcy, since it still has a stigma attached to it - that you didn't know how to manage your money, that you're poor, that you're a screwup, and on and on.

Avoiding bankruptcy is a good thing - having a bankruptcy on your record lasts for ten years, and even if you manage to build your credit score back up in the future, just seeing that public record there on your credit report will scare away many many lenders. So what can you look for when you need to find a bankruptcy alternative that will work for you?

One of the forgotten bankruptcy alternatives is to just do nothing. That's right - don't waste time with court, filing, and high fees. If you don't own any secured property you want to keep, then let the creditors just keep calling. they may file suit, and get a judgement against you, but if you have no property, it will be hard for them to execute on that judgement. In some cases, you may have your wages garnished, but if it gets to that point, you can consider bankruptcy then. True you may have to change you phone number, since creditors will be calling you nonstop, and trying all kinds of sleazy tactics to get you to pay, but that's the price you'll have to pay.

Another bankruptcy alternative is to try to work out deals with your creditors on your own. If you have a regular income, a bankruptcy court will probably expect you to file Chapter 13. And in Chapter 13, what you will do is file a repayment plan with the court. So why not set one up on your own? Today, with debtors in so much trouble, many lenders and creditors are offering many new programs and repayment options for everything from credit card debt to car and home loans. It pays to at least try to work with them. In the end, if they refuse, then bankruptcy remains an option for you.

Sometimes, you can sign up with a credit repair firm who can help you with working out plans with your creditors. Firms like Care 1 Credit are set up to help you work with creditors to repay debt. This can be one of the more useful bankruptcy alternatives available to you.

Remember that some debts, like child support and student loans, you can't discharge in bankruptcy anyway. So for that type of debt, you don't really need an alternative, you need to adjust your current repayment plan if possible. Bankruptcy alternatives won't work in every case, as you can see.

The first thing you should consider is whether to file at all. If you have a lot of credit card debt, you may be a candidate for bankruptcy. but if your debt is mostly all student loan debt, for example, bankruptcy won't help you because you can't discharge student loan debt in bankruptcy. You also can't discharge obligations such as back taxes or support payments to a spouse or child. If you have a lot of unsecured debt, you might pursue bankruptcy. But if your debt is secured, such as a home mortgage, and you want to try to save your home, you will want to possibly use bankruptcy as a way to set up a payment plan and avoid foreclosure.

Once you decide to file, your bankruptcy options as an individual are mainly two. First there is a Chapter 7 bankruptcy, where you are permitted to discharge most debt. This option however is usually limited to people without a regular income. If you are working, you will have to pass a "means test" to determine whether your living and other expenses coupled with debt payments are just not possible given your income. However, if you have regular income and you do not pass the means test, the court may move your case into Chapter 13 bankruptcy, since you have some income to pay your debt. In this chapter, you will set up a repayment plan that lasts from three to five years. This can help you save your home, or other assets you don't want to lose.

Chapter 13 is fairly detailed in that you will have to provide a lot of detail about your present expenses, your income, your debt payments, and so on. It is also not a guarantee that you will be able to keep the assets you choose. For either type of filing, you will also have to do credit counseling prior to filing. During that process, you may find there are other ways to pay down your debt and not have to file for bankruptcy.

How do you decide whether to file or not? One rule of thumb is that is your total debt is greater than your annual income, you are probably a candidate, since it will take such a long time to pay off your debt after your regular living expenses. Some financial advisor however say you should do everything you can to avoid filing for bankruptcy, since it will damage your credit for a long time - it's on your credit report for ten years. Pick up a second or third job, slash your living expenses, and work out repayment plans with your creditors on your own. This is one of your legitimate bankruptcy options, and can even help you prevent having serious credit problems in the future.