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Part of the process for deciding whether or not to file for bankruptcy includes looking at your alternatives. Depending on the state of your finances, the type of your debts, and your financial goals, a nonbankruptcy alternative may be better in your situation. Some possible alternatives to declaring bankruptcy if you are in debt include the following.
(For more in-depth articles on ways to hanlde debts outside of bankruptcy, see Dealing With Debts.
Negotiate With Your Creditors
If you have income to spare, or property you are willing to part with, you may want to negotiate directly with your creditors. For some people, it's better to settle debts at a discount, get a more affordable payment plan, or negotiate other deals with creditors than file for bankruptcy.
Enter Into a Debt Management Program
In a debt management program a credit counseling agency helps you design a plan to pay back all (or some) or your creditors over time. This is similar to a Chapter 13 repayment plan with one advantage: You won't have a bankruptcy on your credit report.
Debt management programs have some disadvantages though. For example, if you miss a payment during your Chapter 13 repayment plan, Chapter 13 protects you from creditors who would start collection actions. This is not true with a debt management program. If you miss a payment, any one creditor can start collections against you. In addtion, you usually pay your debts in full through a debt management program. Most Chapter 13 filers end up paying only a portion of their unsecured debts; the rest are discharged.
Choose a Credit Counseling Agency Carefully
If you are considering a debt management plan, the most important factor is to choose a counseling agency that is legitimate -- there are lots of scammers out there. It's best to stick with an agency that is approved by the United States Trustee (go to www.usdoj.gov/ust, and click "Credit Counseling and Debtor Education") or that is affiliated with the National Foundation for Credit Counseling (www.nfcc.org). To learn more about credit counseling agencies, see Nolo's article Choosing a Credit Counseling Agency.
Some people have so little income and property that there is nothing that creditors can take if the debtors default on debts. If this is your situation, you are what's called "judgement proof" and bankruptcy may not be necessary.
For More Information
For a comprehensive rundown of all your options for dealing with debt, check out Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Robin Leonard and attorney Margaret Reiter (Nolo).