Alternatives to Chapter 7 Bankruptcy
Do You Have Other Options? Maybe.
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. You can 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 bankruptcy Chapter 7 may include:
- Contacting Consumer Credit Counselors. They 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. Additionally, they are often more likely to receive the money they are owed. This is 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 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. There is no requirement that all creditors enter into a composition or extension. However, 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. This may include 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. All creditors must enter into an assignment, including secured creditors of the debtor, to be enforceable. Unsecured creditors often agree to assignments for the same reasons as stated above. They can avoid the complex bankruptcy proceedings and obtain 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.
Alternatives to Bankruptcy Chapter 7: Chapter 11 and Chapter 13
Although non-bankruptcy alternatives are preferable, sometimes bankruptcy is inevitable. When you are facing bankruptcy, it is important to decide which bankruptcy options best fit 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 bankruptcy, 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 can repay his debts over a period of three to five years. During this time, he can retain 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. Many people prefer Chapter 13 bankruptcy over Chapter 7 bankruptcy because you can retain any real property. Additionally, creditors view it more favorably. However, the downside is your credit report still reflects the bankruptcy for seven years after you finish paying off debts. See the “Process of Chapter 13 Bankruptcy” page for more information on Chapter 13 bankruptcy.
If you are considering filing for Chapter 7 bankruptcy, a Washington DC and Maryland Chapter 7 bankruptcy lawyer should assist you. You can view all alternatives and make the ultimate decision regarding which course of action to take. Contact attorney Kevin D. Judd today for a free consultation to answer any questions you may have and to assist you throughout the bankruptcy process.