Best Bankruptcy Alternatives to Choose from (2023)

The law makes provisions for people laden with debts to file for bankruptcy in order to ease their financial obligations. Sadly, doing so comes at a steep cost to one’s credit status. Why file for bankruptcy when you have bankruptcy alternatives that are largely more friendly? Read to the end to learn bankruptcy alternatives you can explore in times of need and still maintain a fairly good credit record.

Let’s Start by Understanding What Bankruptcy Is

What is Bankruptcy

Bankruptcy laws in the United States give a fresh start to individuals or businesses that are overwhelmed with debts. The expected relief can come in the form of dischargeable debts, creation of viable repayment plan, or alteration of debt terms.

It is a federal protection law designed to help people who have no means of paying their debts. Such debts may include credit cards, personal loans, medical bills, etc.

When these people or businesses file for bankruptcy, they choose between Chapter 7, which deals with liquidation bankruptcy and Chapter 13 bankruptcy, which makes provisions for repayment bankruptcy. The choice you make in filing bankruptcy will determine whether you still have to complete a repayment under a modified, easier repayment arrangement (may require selling your assets) or get your debts significantly canceled.

Sounds sweet, right?

Sorry to disappoint you though! Bankruptcy is not as rosy as you may have started presuming. This is why serious minded businessmen and women will always shudder at the suggestion of bankruptcy for their debt relief. They are afraid that the damning consequences will, in many ways, hamper their business growth in the long run.

In subsequent sections, I will enumerate the cons of bankruptcy, but before that, let’s look at viable bankruptcy alternatives that you can benefit from without jeopardizing your business trajectory or personal credit record.

Viable Bankruptcy Alternatives

1) Debt Management Plan

When debts become devastating, professional guidance may be required to salvage your business and keep a good image. Consider Debt Management Plan (DMP) if you are being consistently weighed down by debts. DMP is a scheme that requires a certified credit counselor to organize a repayment program that properly factors your current financial situation.

This certified credit counselor ought to review your finances and use the same to determine a realistic amount of money that you can conveniently put aside each month for debt repayment without being overstretched. Then, they would proceed to negotiate with your creditors with the aim of finding a common ground to resolve your debts in a few years.

There are few exceptions though. Debts like child support or unpaid alimony and federal student loans are types of debts that cannot be resolved through DMP negotiation.

Often, when your credit counselor meets your creditors, they analyze your current financial situation and explain why DMP is more favorable to them than filing bankruptcy. It works almost all the time. It’s highly unlikely that any creditor will turn down an opportunity to get back their money if they know that doing so may force you into bankruptcy and resultantly  deprive them of the opportunity to receive any payment.

Under a DMP program, creditors don’t expect 100% payment because fees and additional interests are cut off. But to them, it’s a lesser evil compared to bankruptcy that has the tendency of denying them any payment at all.

2) Debt Consolidation

By debt consolidation, we refer to a scheme that allows you to take out a new loan to enable you to pay off a number of other existing loans. This means that you now have the leeway to harmonize different debts with distinct terms into a single, larger loan with clearly modified, more favorable payoff terms like lower monthly payments and lower interest rates.

Take for example, supposing you owe a total sum of $20,000 to three different creditors with a 22.99% average annual interest rate. To pay off this loan to a zero balance by the end of a-24-month period, you would need to pay $1,047 a month. During this period, you would pay roughly $4,603 in interest.

Consolidating these debts into a lower interest loan at an 11% annual interest rate would have you paying $932 each month for 24 months instead of $1,047. At the end, your total interest payout would be roughly $2,157 instead of $4,603. That’s not all. Opting for a new credit card may qualify you for a 0% introductory interest rate for up to 21 months in some cases.

3) Credit Counseling As A Bankruptcy Alternative

Seeking professional counseling from a credibly certified nonprofit credit counseling agency is a good way to mitigate negative impacts of debts when they become overwhelming. In their services, these agencies can analyze your entire household cash flow, covering, income, expenses, and debts. Doing this puts them in a good position to help you to develop a befitting budget plan with the aim of providing allocations for debt settlement over a period of time.

The agency’s approach will largely depend on the severity of your debt situation. Often, coaching and advice are part and parcel of their packages. These are seasoned monetary managers. So making good application of their resources will certainly be impactful in your attempts to take control of your debts and eliminate the prospect of bankruptcy.

If your debt situation needs more than prudent planning, these agencies may still be in the best position to help you stave off bankruptcy by helping you to work out a repayment program with your creditors. This will be done with the intention of lowering your payment to the very possible least and you may just be lucky to get your debts completely resolved within a few years through this program.

4) Judgment Proof As A Bankruptcy Alternative

Before ever thinking of bankruptcy, make out time to find out if judgment proof is a thing for you. Being judgment proof shields you from repayment obligations if your creditors decide to sue you for your inability to repay a debt.

To start with, you can’t be put in jail for not being able to offset your debt (with child support as an exception though). If you are sued, your creditor may get a judgment against you for the money you owe them, plus accrued interest. However, this won’t happen if you are judgment proof.

When you are judgment proof, it simply means that your income and property cannot be seized for debt repayment because by law, it’s “exempt” from the creditors’ claims. Your property and income being exempt automatically puts your creditor at a disadvantage. The law won’t recognize your income and property as repayment factors if they merely support your basic survival. Then you’ve got nothing a creditor can seize.

5) Consumer Proposal

Consumer proposal is another viable bankruptcy alternative that you can explore. It is a legal pact between your creditors and you to pay only a part of the debt you owe them. This arrangement is proposed by a certified bankruptcy trustee to your creditors as a friendlier alternative to outright personal bankruptcy declaration.

Both parties will try to ascertain the amount to be repaid through negotiation, which is also largely dependent on what you own and income. This arrangement is attractive, basically because when it succeeds, it always reduces the amount to be repaid significantly.

6) Individual Voluntary Agreement (IVA)

Is IVA better than bankruptcy? Let’s find out.

Individual Voluntary Agreement (IVA) is a pact between a creditor and their debtor that aims to repay as much money to the creditor as possible while also being fair to the debtor.

In this repayment arrangement, a program is set up, whereby your creditors receive a certain amount of money each month. This arrangement is made based on what you are capable of offering based on your current level of income.

One important benefit of IVA is that you won’t lose your assets, such as cars or houses, which might otherwise be the case if you declare bankruptcy.

Insolvency practitioners are the people with legal licenses to administer and set up IVAs and it offers a way to take pressure away from the debtors by stopping all forms of undue harassment that would come to them as a result of the debts they owe.

Importantly though, under this program, you, as a debtor, won’t have to worry about high interest rates on the debts you owe as all interests on the said debts will be completely frozen. Based on this and a few more reasons, I will say that an IVA is a better alternative to bankruptcy any day any time.

7) Make More Money

Increase your income. Easy to say, right?

Well, the gig economy has, somehow, simplified money making. This is an age when anybody with a smartphone and a bit of spare time can add to their income.

The gig economy is available to everyone and it’s virtually everywhere you turn to – there is something for every skill. Instead of leaving your car parked endlessly in the garage, why not drive for a ride-sharing company like Lyft or Uber. If you are efficient in following directions, why not sign on with a home delivery company such as DoorDash, InstaCart, Uber Eats, or Grubhub and turn your idle car into an income stream?

Can you write or edit proficiently? How about graphic design, programming, tutoring or consulting? Can you work as another freelance journalist? The trend is tilting towards creative occupation and there is a lot of money to be made from the listed services.

The beauty of it is that you can give these services on your one schedule. Just a few hours and you are done for the day. Expanding your income streams in this manner will help you to pay off your debts without resorting to bankruptcy.

You can start right away by signing up on freelance job sites like Freelancer, CloudPeeps, Upwork, Fiverr, SolidGigs, or Flexjobs.

Earlier in this article, I promised to enumerate the cons of bankruptcy. Let’s look at that. The intention is to discourage you from filing for bankruptcy without considering other better alternatives.

Why Bankruptcy Is Not Such A Great Idea for You

You don’t want the stigma that comes with bankruptcy, do you?

Society doesn’t care to know how dire your financial crisis was before you finally gave in and filed for bankruptcy. All that matters in the narrative is that you actually did file for it. Therefore, you are one of those that must be stereotyped as unethical, lazy, and irresponsible.

Bankruptcy destroys your credit record. This can hamper your business growth as it makes it hard for you to borrow in the future. Again, filing for bankruptcy is expensive. You will need to pay up to $3,000 for attorney fees and another $330 processing fee.

If this doesn’t sound bad enough, bear in mind also that you will have to give up all your luxury items. Everything you own, outside those that support your basic survival, will be sold.

What if I Pay My Debt Without Any of these?

If you have the wherewithal to repay your debts following the original arrangement, bankruptcy and all the other alternatives won’t be necessary at all. Not only will paying your creditors timely help you to retain a clean credit record but it’s also a thing of honor and dignity.

In addition, almost all the available debt alleviation programs come at a cost. For example, to arrange for a consumer proposal, you need to contract it to a licensed bankruptcy trustee who will request $750 to process the arrangement. If you are lucky, it will be accepted by the creditor. If accepted, you will still need to pay another $750 to proceed.

Conclusion

The best thing to do when you owe money to someone is to pay as agreed. If things fall on the wrong side and you lose the opportunity to pay promptly, explore bankruptcy alternatives so that your credit record and status in society will not be ruined.