Alternatives to Bankruptcy

Back in the day, someone who took the route of bankruptcy to solve their financial problems was perceived as a failure. Bankruptcy is a process by which someone who cannot pay their debts when they fall due enters into a formal and legally approved agreement with their creditors. At one time, bankruptcy was considered to be tantamount to social disgrace, but there is not such a stigma attached to it today. However, bankruptcy is better viewed as a last resort rather than the first step to take when the going gets tough. These are some of the available alternatives to bankruptcy.

Ask creditors to formulate an alternative payment plan

Many creditors would rather negotiate alternative payments than see their debtors declared bankrupt. With an alternative payment plan, there is a chance that they may recover all the money owing to them, but once a bankrupt is discharged, the debt is also discharged, and creditors may only recover a percentage of what is owed to them. In addition, most of the costs of filing for bankruptcy fall on the creditors seeking the order, so it can be a very expensive process.

Ask if payments can be lowered, if late payment penalties can be avoided, and if interest can be frozen. Your creditor may agree to one, more or none of these options, but it’s certainly worth a try.

Sell assets

It depends on how much you owe in total, but if you can sell assets to pay off some or all of your creditors, it’s an option worth exploring. However, if your available assets will only pay off a small percentage of your debts and bankruptcy remains a real possibility, it’s best to avoid this route. When proceedings commence, the sale of assets may be construed as a fraudulent attempt to dispose of assets and realise capital, rather than a legitimate attempt at paying off creditors.

If you realise your assets and reduce the amount you owe but are still left with debts, approach your creditors and ask for a review of your existing payment methods. Most creditors will be prepared to consider this if they believe you are genuinely trying to service your debts.

Use savings

Paying off debts with savings will, in most cases, save you more in interest than you will earn in interest on your savings. Be sure to keep a small emergency fund, and don’t be tempted to raid your pension fund, especially if your debts are so great that you may still face the possibility of bankruptcy even after using your savings. In bankruptcy proceedings, pension funds are usually protected.

Debt consolidation loan

If much of your debt is unsecured debt, such as credit card debt, you may be able to take out a loan against the equity in your home to pay off your debts. However, if you default on the payments your home will be at risk, so take independent advice to ensure that this is a more viable alternative in your case than bankruptcy.

Debt counselling/ Debt management

Some companies offer a service whereby they will contact your creditors and negotiate more favourable terms such as reductions in interest, lower payments and extended payment time. The company will charge a fee for this, and if the debt is so high that you will not be able to pay it off, even with more equitable terms, your creditors may be unwilling to negotiate.

For more advice on alternatives to bankruptcy, consult the appropriate government body in your home country. While specifics may vary from country to country, the basic parameters for declaration and management of bankruptcy are broadly similar. It’s important to seek independent advice, as some debt management companies may be more concerned with signing you up as a client than providing the financial advice that is best suited to your particular circumstances.