Alternatives to Chapter 7 Bankruptcy
Information Provided by a Maryland and Washington DC Bankruptcy Lawyer
Non-Bankruptcy Alternatives
Because all forms of bankruptcy have some consequences on your credit, it is important to explore all non-bankruptcy options first. One alternative to bankruptcy is to re-evaluate your current lifestyle and work to reduce your expenses so that you can afford to pay off your debts. You may be able to reduce your expenses or obtain money to repay your debts by:
- Selling a second vehicle
- Obtaining a loan from a relative
- Selling your home
- Cashing out on your 401K or other retirement benefits
- Selling any valuable assets, such as jewelry or family heirlooms
If, however, your expenses are already as low as possible and you are unable to sell enough assets to repay the debts you owe, you may need to look at other alternatives. Other non-bankruptcy alternatives to Chapter 7 bankruptcy include:
- Contacting Consumer Credit Counselors, who can help you make a budget and negotiate a repayment plan with credit card companies to obtain a reduced interest rate on your debt
- Entering into a workout arrangement
- Compositions and extensions
- Assignments for the benefit of creditors
Workouts:Workouts are modifications of debt that are agreed upon by both the debtor and his or her creditors. Essentially, the debtor agrees to repay the debt at a slightly lower amount or with extended repayment terms. Creditors are often receptive of such agreements because they avoid the procedural requirements of bankruptcy and are often more likely to receive the money they are owed, due to the class system of distribution in Chapter 7 bankruptcy. Debtors often prefer workouts because the debtor avoids the negative credit issues associated with Chapter 7 bankruptcy, as well as the stigma of filing for bankruptcy. Additionally, the debtor preserves his right to file for bankruptcy in the future, if necessary.
Compositions and Extensions: Compositions and extensions are forms of workout agreements that exist between a debtor and his creditors. Compositions are contracts entered into by at least two creditors where the creditors agree to accept partial payment of the debt owed in full satisfaction of the debtor’s claims. An extension, on the other hand, is a contract, also between a debtor and two or more creditors, in which the creditors agree to extend the time for repayment. Some agreements are both compositions and extensions, where creditors agree to accept less money over an extended period of repayment.
Compositions and extensions are governed by contract law, rather than the debtor-creditor rules that govern general creditors’ rights claims. While there is no requirement that all creditors enter into a composition or extension, most creditors must voluntarily enter into the agreement for it to work effectively. This is because creditors who do not agree to the composition or extension retain their rights under state and federal law to collect any debts owed, including filing for involuntary Chapter 7 bankruptcy against the debtor. The majority of creditors enter into such agreements because they are more likely to recover the debt owed and can avoid the hassle of going through the bankruptcy process.
Assignment for the Benefit of a Creditor: While workouts, including compositions and extensions, are similar to the Chapter 13 bankruptcy reorganization process, assignments are similar to the Chapter 7 liquidation process. An assignment occurs when a debtor assigns all non-exempt property to an assignee that liquidates the assets and distributes the proceeds among the creditors. An assignment must be entered into by all creditors, including secured creditors of the debtor, to be enforceable. Unsecured creditors often agree to assignments for the same reasons as stated above – avoiding the complex bankruptcy proceedings and obtaining the money owed in a timely fashion. Secured creditors are often also amenable to such an agreement because they can avoid the legal costs and risks associated with foreclosure proceedings.
Bankruptcy Alternatives
Although non-bankruptcy alternatives are preferable, sometimes bankruptcy is inevitable. When you are facing bankruptcy, it is important that you learn which bankruptcy options are the best fit for your current circumstances. There are two main forms of bankruptcy that are often alternatives to Chapter 7 bankruptcy: Chapter 11 bankruptcy and Chapter 13 bankruptcy.
Chapter 11 Bankruptcy:Chapter 11 bankruptcy is an alternative for business entities, including corporations, partnerships, and sole proprietorships, that wish to avoid liquidation and continue their business operations. Under Chapter 11, the court allows a debtor to repay a smaller amount of debt or to repay existing debt over an extended time period.
Chapter 13 Bankruptcy: Chapter 13 bankruptcy is an alternative for individual debtors (and some sole proprietorships) with regular income streams. Under Chapter 13 bankruptcy, a debtor is permitted to repay his debts over a period of three to five years, while retaining his non-exempt property, including any real property. During the repayment period, no interest or late fees accrue. Upon completion of the agreed payments, the entire debt is discharged and the homeowner retains ownership of any real property. Chapter 13 bankruptcy is often preferred over Chapter 7 bankruptcy because you are allowed to retain any real property and it is viewed more favorably by creditors. However, the downside is that your credit report still reflects the bankruptcy for seven years after you have finished paying off your debts. See the “Process of Chapter 13 Bankruptcy” page for more information on Chapter 13 bankruptcy.
Conclusion
If you are considering filing for Chapter 7 bankruptcy, a Washington DC and Maryland Chapter 7 lawyer should assist you in viewing all alternatives and making an ultimate decision regarding which course of action to take. Contact Maryland and Washington DC Chapter 7 attorney Kevin D. Judd today to answer any questions you may have and to assist you throughout the bankruptcy process.
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