The stigma attached to bankruptcy and the economic and financial repercussions following bankruptcy, prove to be the biggest deterrents for filing it in the first place. Bankruptcy does not signify a lack of intentions on the part of the debtor to pay off his loans, but merely his inability to do so, which the court recognizes and offers legal protection subsequently.
However, bankruptcy is not the only avenue open to a debtor. He can also use one of the following alternative courses of action:
- No action, letting things be as they are – A debtor does not necessarily have to resolve his debt issues. He can let his debt remain. Bankruptcy is a solution to prevent creditors from getting a judgment against him. A judgment against him without filing bankruptcy means that creditors will try to seize some of his assets or property or a part of his earnings. If however, he neither has wages nor any assets, the creditors cannot take anything away and this makes the debtor “judgment proof”, since the judgment will have no impact. Also creditors also do not start legal proceedings against a person with no assets. With the passage of time, which is 7 years in most states, the debt will be removed from the debtor’s credit record.
- Money management, initiating stringent steps– A debtor often ends up in the position leading to bankruptcy when his expenses exceed his earnings. Over time the expense wipes out all his earnings and savings as well. If he were to adopt stringent measures, curtail his expenses to a level below his earnings and also save a part of his salary, he will gradually be able to reverse his situation. Measures include, opting for cheaper food items, stop eating out, using public transport, not go for vacations, cut telephone and electricity expenses.
- Negotiations with creditors – Bankruptcy may in some cases like chapter 7 lead to a complete discharge of debts. In this case the creditors become the biggest losers. Interested in getting some of their loaned sums back, the creditors are often open to out of court settlements in which the debtor asks for more time and promises to pay a fixed amount each month. This is a viable option only if the debtor has a steady income and some assets.
- Restructuring of debt – Debt restructuring is an option available to businesses whereby a company facing problems of cash flow or showing signs of financial distress, is allowed to renegotiate its unpaid debts, so that it can stay in business by improving its money situation. Restructuring out of court, is becoming increasingly popular since it is a cheaper option and preferable to bankruptcy. It is also called workout, and involves a lot of time in negotiating with banks, financial agencies, tax authorities, creditors and vendors. It also involves an extension of the time frame in which the debts have to be repaid.
- Debt consolidation – Debt consolidation involves taking a single loan from a low interest organization like a bank and using it to pay multiple higher interest debts like credit card debts, loans from creditors and so on. This alternative is appropriate in situations when paying the interest on outstanding amounts becomes difficult. With debt consolidation the debtor is left with a single low interest payment instead of multiple high interest ones. The amount he saves on interest can also be used for repaying the principal amount, which helps in clearing the loan over a period of time.
These alternatives may save the debtor from the stigma of bankruptcy and having his credit rating affected.