What Are Some Alternatives to Bankruptcy?

Do I Have to File Bankruptcy?

When an unexpected layoff at work or a serious illness creates an overwhelming financial crisis, people may be left asking themselves: “Do I have to file bankruptcy?” The answer is never ‘Yes, I have to file.” Sometimes there are good non-bankruptcy alternatives. Sometimes (but rarely) doing nothing is the best alternative. And sometimes filing for bankruptcy protect is the best of the alternatives.

A consultation with a bankruptcy lawyer offers the perspective of someone with experience offering assistance to people overwhelmed by debt and financial challenges. People consulting with legal counsel about a bankruptcy may be offered other effective options for resolving debt issues.

Bankruptcy Options for Consumers

The most common bankruptcy options for consumers are Chapter 7 and Chapter 13. Chapter 7 may be the one that comes to mind when people think about bankruptcy.

A trustee appointed by a bankruptcy judge takes control of a debtor’s assets and sells them. Money received through the sale is applied toward reduction of the debts owed by the person filing for bankruptcy. The end result is that debts remaining are discharged to give the debtor a fresh start.

The downside of Chapter 7 for a debtor with many assets is that may not be totally are exempt. Even though the proceeding is federal, Virginia law limits available exemptions that would protect assets from seizure by creditors or in a bankruptcy. The following are some of the exempt assets under Virginia law:

  • Equity in property used as a primary residence may be protected up to $25,000 plus $500 for each dependent in the family. Disabled veterans and anyone 65 years of age and older may claim an exemption of as much as $10,000.
  • Wedding and engagement rings.
  • Personal clothing with a total value of $1,000 or less.
  • Household furnishings not exceeding a total value of $5,000
  • A car or other motor vehicle with a net (after deduction the claim of the properly secured creditor) value of $6,000 or less. (Secured creditors always have the right to the asset over the rights of the bankruptcy trustee and the debtor.)

The other bankruptcy option for consumers with steady incomes is a Chapter 13, which offers consumers the opportunity to repay their debts under a court-approved plan. At the end of the three to five year duration of the plan, any balance remaining on otherwise dischargeable debts is discharged.

Both Chapter 7 and Chapter 13 bankruptcy options have eligibility requirements that debtors must meet, so a bankruptcy law firm should be consulted.

Negotiating a Payment Plan with Creditors

But in many cases, other alternatives to allow a person to avoid filing for bankruptcy. One of them includes approaching creditors with the goal of working out a repayment plan similar to what a person might achieve during Chapter 13 representation by a bankruptcy attorney. Your bankruptcy attorney can assist when there one or two creditors to work with, and when you have a lump sum of money that you can immediately pay to settle a debt. (A rule of thumb is in the 40% range, but the creditor drives this train.)

The attorney for the debtor would attempt to convince the creditor to take the lump sum reduced amount rather than suffering a possible total loss if bankruptcy is sought.

The assistance of an attorney known to file bankruptcies for clients is often advantageous in these types of negotiations. Working with an experienced bankruptcy attorney may add credibility to the debtor’s proposal.

Debt Consolidation Options

Consolidation of several loans or the balances on multiple credit cards into a single payment may make it easier for debtors hoping to get their finances back on track. A debt consolidation loan may offer an option provided the interest rate and monthly payments on the new loan offer a financial benefit to the consumer.

Consumers with poor credit histories may find it difficult to secure financing for a debt consolidation loan without paying exorbitant interest rates and fees or by giving the lender a security interest in property the person owns. For example, a consumer who uses a motor vehicle as security to obtain a consolidation loan may end up having the car or truck repossessed by the creditor when a loan payment is missed.

Some credit card companies offer balance transfers and low, introductory interest rates for new card holders. Transferring balances may offer a savings due to the lower interest rate. The problem that occurs with balance transfers is when debtors fail to destroy the old credit cards and use them to make new purchases and add to their debt.

A home equity line of credit may offer an alternative by allowing homeowners to borrow against the equity in their properties to eliminate high-interest credit cards and personal loans. As with other forms of debt consolidation, the debtor should close credit card accounts to avoid incurring additional debt.

Debt consolidation using a home equity line of credit may expose borrowers to the risk of losing their home unless payments are made on time. Defaulting on a home equity loan gives the bank the right to foreclose on the property and sell it to satisfy the debt.

Help for Former Military Service Members

Former members of the armed services who suffered traumatic, service-connected injuries are eligible to receive compensation through Service Members’ Group Life Insurance Traumatic Injury Protection from the U.S. Department of Veterans Affairs. The department offers free financial counseling to help veterans manage their finances as they transition into civilian life.

The counseling offers a variety of services, including creation of a financial plan designed to avoid financial pitfalls by showing veterans how to properly manage their money. It provides assistance in developing and executing customized strategies to payoff burdensome debt that could put veterans in a position of asking: “Do I have to file bankruptcy?”

Get Advice From a Hampton Roads Bankruptcy Attorney

Anyone experiencing financial challenges caused by overwhelming debt should speak with the bankruptcy lawyers at the Newport News – Yorktown bankruptcy law office of the Denbigh Law Center. They offer options, including alternatives to bankruptcy, to help people through difficult times. Centrally located for serving residents of Yorktown, Newport News, Hampton, Poquoson and Williamsburg, Virginia. Contact them today by calling 757-877-2244 to schedule a consultation.