I’m Deep in Debt, How Can I Avoid Bankruptcy?
Let’s face it, no one wants to file for bankruptcy, however, in certain circumstances bankruptcy is the best solution for dealing with debt that has gotten of control. In this post, we’ll provide some helpful tips for those of you who are dead set on avoiding bankruptcy and getting out of debt without the help of the federal court system. The suggestions listed below are not mutually exclusive and can be used in tandem to help on the long climb out of debt.
Option One: Negotiate With Creditors
It is a not so well kept secret that lenders are often more willing to negotiate once a loan goes into default than they are while it is performing. Part of this is common sense. After all, why would a lender take less than what they’re owed while the borrower is still paying on the original agreement. If you’re trying to avoid filing for bankruptcy, chances are that you find yourself behind on at least some of your debts. If, for example, you are behind on credit card payments and have been for a number of months, your credit card company has likely “charged-off” your debt. A charge off is a declaration by a lender that an account is unlikely to be collected, any payments received after a charge off are viewed as icing on the cake. As a result of a long period of default, lenders may be willing to accept less than 100% in full satisfaction of what you owe. This is a process called debt settlement. In debt settlement negotiations, either you or an attorney will contact your creditor and make an offer of settlement. For example, if you owe $15,000 on a delinquent credit card account, call or letter from a law firm may allow you to settle the debt for a lump sum payment of $2-$3000. The amount that any lender will settle for differs based on the individual circumstances of each borrower and the length of time that the account has been delinquent. Especially when you’re dealing with mortgage lenders, financial statements will often be required as a prerequisite to the commencement of negotiations. The point is, that if you have some cash on hand, it may be possible to “buyout” debts for less than 100% of what is owed and in so doing avoid bankruptcy. One word of caution: be careful with debt settlement companies who advise you to stop making all payments for months or years while you accumulate cash for a settlement. While you’re saving, creditors are taking action against you that can have lasting negative ramifications. You’re much better off hiring an attorney to handle your debt settlement negotiations.
Option Two: Sell Property
In a chapter 7 bankruptcy case, the trustee appointed to administer your estate will review your property to determine whether there is anything of value to liquidate in satisfaction of creditor claims. Only nonexempt property is subject to sale by the bankruptcy trustee. Why not try this yourself first? There is nothing stopping a debtor from selling property and using the proceeds themselves to try to pay off debts or to make them more manageable. If you are struggling with debt but sitting on assets that have value, have them appraised to determine whether a sale may be the ticket to getting out of debt. Be cautious with this step as you don’t want to be in a position where you are liquidating exempt property to avoid bankruptcy. Exempt property is off limits from the bankruptcy trustee, meaning you can file bankruptcy, shed debt and retain your exempt assets. One of the biggest mistakes consumers make is liquidating an exempt 401(k) or IRA account to avoid bankruptcy.
Option Three: Restructure Your Life
Budgeting can be painful. Many people who are hopelessly underwater on credit card debts fear the prospect of bankruptcy, not because of credit reporting, but because it means putting and end to the borrowing cycle. People are afraid, that without access to credit, they won’t be able to live the life that they’ve grown accustomed to. Unfortunately, many Americans live above their means and spend more than they earn. Depending on how deep in debt you find yourself, creating a budget and sticking with it may be enough to get you out of debt without bankruptcy. Cutting back on eating out, gym memberships, movies, magazines, clothing and other common spending traps can go a long way towards freeing up cash flow to pay down debt. Some people find themselves so far behind on bills that even the restructuring will do very little to alleviate their problems. In many cases, it is wise to meet with a bankruptcy attorney to discuss how realistic it is for you to pay down debt rather than filing for bankruptcy.
Option Four: Borrow Money From Family or Friends
Borrowing money from family or friends to pay down debt can be advantageous because, in most cases, the “loan terms” are more lenient. It’s rare that your mother will charge you 29.99% interest like many credit card companies do. If you’re close with your family and high interest credit is making it impossible to pay down principal, a loan from family or friends can often be one of the best debt consolidation tools you have. A word of caution: don’t pay back family or friends right before filing bankruptcy. Doing so can cause a lot of headaches, including lawsuits in which the bankruptcy trustee sues your family or friends to recover the amount that you paid back.
Option Five: Do Nothing
Yes, you read that right. One option to avoiding bankruptcy is to simply do nothing. Don’t file bankruptcy, don’t negotiate, just take your phone off the hook. Many people who find themselves in dire financial straits are stressed out because they can’t pay their bills, but they are also judgment proof, meaning creditors are unable to attach any of their property in satisfaction of their debts. Remember, a judgment only has value to a creditor if the borrower has assets that are nonexempt under their state exemption laws. If all of your assets are exempt, there is nothing that a creditor can do to you. This strategy does hinge, to a certain extent, on whether your state allows wage garnishment. Most states that do have a corresponding wage exemption, however, if you do make a decent wage, there is a chance that your creditors will be able to get access to some of it. While doing nothing can sound appealing to the judgment proof debtor, it is important to point out that a judgment usually lasts for a period of 10 years, meaning that even though you don’t have property today, you may in the future and when you acquire that property the creditor can still come after it. For this reason filing for bankruptcy can be a preventative measure that ensures against the loss of future property based on old debts.
Bankruptcy is not fun, however it does have the potential to provide great financial relief. If you’re dead set on avoiding bankruptcy, make sure you’re doing so for the right reasons and that you have a good plan in place.
Rob Cohen, the Managing Partner of Cohen & Cohen P.C., is a bankruptcy attorney that practices in Colorado and Wyoming. He serves as a Chapter 7 Bankruptcy Panel Trustee, and has to date administered over 8,000 Chapter 7 bankruptcy estates. Rob is a Certified Consumer Bankruptcy Specialist, and was nominated for Denver Business Journal’s 40 under 40 in both 2014 and 2016.