What Are the Alternatives to Filing Bankruptcy for Individuals and Small Businesses?
When you have significant debts you can’t afford to pay, you may be thinking about filing for bankruptcy. But is there another path to debt relief?
There may be. While bankruptcy is one option for debt relief, it isn’t always inevitable, or even the best choice. Depending on your situation, there might be several potential paths toward becoming debt free that could be more appropriate, whether you’re dealing with personal credit card debt or are responsible for a business that’s fallen on hard times.
But before you make a final decision, understand that each alternative to bankruptcy comes with its own set of advantages, disadvantages, and risks. Avoiding bankruptcy sounds good on paper—but if you can’t abide by the terms of your new agreement to settle your debt, you may end up worse off than you started.
In this post, we take a closer look at some of the most common bankruptcy alternatives for individuals and business owners and explain how an experienced attorney can help you make the wisest possible choice.
Bankruptcy Alternatives for Businesses
Debtor and Creditor Workout
In simple terms, a “workout” is any good faith attempt by a debtor to solve a financial problem by negotiating directly with creditors, without getting the court involved. All or part of your debt can be restructured via compositions (the creditor agrees to accept partial repayment), extensions (the creditor agrees to extend the deadline for repayment), or both.
This comes with several potential advantages, which may benefit both sides:
- Flexibility. Workouts allow flexible, creative solutions to debt settlement informed by unique circumstances. The only rule is that all parties have to consent to the agreement.
- Potentially faster resolution. Bankruptcy proceedings are often time consuming due to notice requirements, reporting requirements, potential challenges, and more. Workouts can be negotiated faster, especially if there are only a few major creditors.
- Lower cost. Without the extra professional and filing fees, workouts are often much less expensive than bankruptcy. This can be a particularly motivating factor for creditors, if funds that might have otherwise been paid toward the expenses of a Chapter 11 filing can go to them instead.
- Discretion. Bankruptcies are public filings, and can come with reputational damage that affects your employees, partners, and status in the community. Workouts, however, can remain private between creditors and debtors.
Because workouts require the consent of all parties, they tend to work best in certain scenarios. For example:
- There are only a few major creditors
- You have had (and continue to have) good overall relations with your creditors; they are willing to work with you without hostility
- Your company’s organization and debt structure are fairly simple
Assignment for the Benefit of Creditors
An assignment for the benefit of creditors (ABC) is a liquidation of a business’s assets under state law. This is a potential alternative to a Chapter 7 bankruptcy for a business, and can often be a faster and cheaper way to wind down operations.
In an ABC, all the businesses’ assets are voluntarily transferred to an independent third-party assignee. The assignee will liquidate the assets and repay creditors, and may continue to run the business as a going concern.
Because of the nature of this option, an assignment for the benefit of creditors is not an option for a business that does not wish to liquidate and close down operations. But if you’re looking for an exit strategy, an ABC may provide a faster solution that minimizes costs, liability risk, and negative publicity.
Forbearance Agreement
Maybe you’re unable to settle your debts right now due to a temporary cash flow issue, but you (and your lender) do expect that you will be able to pay in full later. Under a forbearance agreement, the lender and borrower agree to postpone, reduce, or suspend payment due on a loan for a specific, limited time period.
The borrower is still responsible for interest on the loan that accrues during the forbearance period. The lender’s agreement not to foreclose on the property or accelerate payments is made in exchange for the borrower’s agreement not to fight the creditor’s efforts to collect, should the borrower fail to abide by the agreement’s terms.
Sometimes, the borrower offers the lender a “deed in lieu of foreclosure” in the event that it does not live up to the terms of the agreement. In other words, you agree to give ownership of your home or business to the lender, in exchange for getting out of your debt liability.
Bankruptcy Alternatives for Individuals
Debt Consolidation
In this approach, you take out a single debt consolidation loan or line of credit, and use it to pay off multiple debts—for example, auto, student loans, credit card debt, etc.
There are two main advantages to doing this. One, the interest rate on the debt consolidation loan may be lower than the combined effective interest rate on all the other debts, saving money. The other is simplicity—now, you only have one creditor, and one monthly due date to worry about, rather than several.
That being said, there’s no guarantee that your interest rate will be lower. The lender may also charge significant fees, and missing payments on your consolidated loan may put you in an even worse place than before. You should only consider this kind of option if you have a good credit score, a steady and reliable income that exceeds your monthly expenses, and you’re confident you can afford to repay the loan.
Debt Settlement
In short, debt settlement is an attempt to renegotiate the terms of your debt with those that you owe money to, either on your own or with assistance (such as a debt settlement company or attorney). Usually this means convincing your creditors to forgive a portion of your total debt and agree to settle debts for a fraction of what you actually owe.
This, as you can imagine, is easier said than done. While debt settlement can work, it does come with downsides. For starters, you’d already need to be in default; it’s unlikely that any creditor would agree to forgive debt if you’re still making minimum monthly payments. And there are other downsides, too. For example:
- For-profit debt settlement companies often charge high fees and may have less-than-stellar reputations.
- You may owe taxes on the amount of debt forgiven, which can be taxed as if it were normal income.
- Your credit score may be negatively affected.
Debt Management Program
Under a debt management program (also known as a debt management plan), you work with a nonprofit credit counseling agency or attorney to build a plan to pay off high-interest unsecured debts over a period of time, typically 3-5 years.
The agency analyzes your finances and tries to work out an arrangement with your creditors to repay the debt at a lower interest rate. If your creditors approve the plan, you will then make a fixed monthly payment to the agency, who uses that money to pay off your debts.
Debt management plans can be considered a form of debt consolidation, but there are some key differences. The main advantage is that you don’t have to take out a new loan to pay older loans. But there are downsides, too. You’ll have to close all your credit card accounts, and you won’t be able to open any new lines of credit—for example, take out a home or auto loan.
How a Bankruptcy Attorney Can Help
Frequently, creditors refuse to deal directly with debtors looking to renegotiate the terms of their debt. However, they are often more willing to negotiate with the debtor’s attorney. Creditors understand that many debtors (once represented) will seek bankruptcy protections if they’re unable to renegotiate their debt. So, creditors may be willing to accept a reduced payment rather than risk the debt being erased completely by a bankruptcy.
You might think it strange to go to a bankruptcy attorney to look for alternatives to bankruptcy. But the truth is that an experienced attorney can give their clients a broad perspective and help them evaluate all their options for settling debts.
Bankruptcy attorneys like Steve Rayman at CBH Attorneys & Counselors can help you:
- Track down, organize, and evaluate your financial records
- Negotiate with your creditors and help you find ways to avoid bankruptcy, if possible
- If bankruptcy can’t be avoided, help you decide which form of bankruptcy to file, handle all the paperwork and deadlines, represent you in court proceedings, and handle all the complexities of your case.
- Regain peace of mind and put you on as solid a financial footing as possible at the other end of the process.
RELATED: Bankruptcy: Relief for the ‘Honest but Unfortunate Debtor’
Don’t Put Off Dealing With Your Debt
Dealing with debt is almost always painful and difficult. Borrowers are often in denial about how bad the situation really is, and delay seeking help as long as possible.
While this is completely understandable, it’s also unwise. The sooner you seek out an experienced attorney, the more likely they’ll be able to help you avoid bankruptcy, save money, and settle your debt on favorable terms, with fewer personal and professional sacrifices.
At CBH Attorney & Counselors, we take a compassionate and judgment-free approach to all our debt relief and bankruptcy cases. We know that money and debt problems happen to good people. We will always treat you with kindness, honesty, respect, and discretion, and put your best interests first.
CBH Attorneys & Counselors: West Michigan’s Experienced, Compassionate Bankruptcy Lawyers
No one deserves to be permanently buried by unmanageable debt. Our team of Grand Rapids and Kalamazoo attorneys is here to take the stigma out of debt problems and bankruptcy and help you rebuild your financial future.
If you would like to explore possible resolutions to your personal or business debt issues, we invite you to contact us today or call us at (616) 608-3061 for a free consultation.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.
Contact CBH Attorneys & Counselors Today
If you have questions about your legal options, we’re ready to speak with you. If you or a loved one are in need of legal assistance, contact us today to schedule a consultation with a member of our team.
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