Chapter 7 bankruptcy: might an alternative approach be better for you?

Overwhelming debt can happen to anyone and it's not a reflection on character. Especially in the current economy, a financial challenge can be the tipping point for an individual or family toward crushing debt. For example, unexpected and unplanned-for divorce, medical emergency, interruption of medical insurance coverage, job loss, breadwinner death or another similarly serious situation could send many an American into a financial abyss.

If you face a financial crisis, talk to an experienced bankruptcy lawyers near me about whether bankruptcy might be the right answer for you. Most commonly, average consumers (and some small businesses) file Chapter 7 (of the U.S. Bankruptcy Code) bankruptcy, also called liquidation bankruptcy. To qualify for Chapter 7, you must pass a means test that looks at your income level.

Broadly, in Chapter 7 you get to keep certain exempt assets and the rest are sold to pay down your debts. The remaining debt is erased and no longer owed, unless the debt is in a class that is not dischargeable like child support, some taxes and most student loans. Practically, many people do not own much nonexempt property so little property must be sold before debts are discharged.

However, there can be better alternatives to Chapter 7 bankruptcy depending on individual circumstances. Chapter 7 will have an initial negative impact on your credit rating and it stays on your credit report for 10 years. Your particular type of debt may not be dischargeable. You may not want to liquidate the assets of your business or you might own something you do not want to part with like a family heirloom.

Here are some possible alternatives to filing for Chapter 7:

  • Personal adjustment: You may be able to make personal changes that allow you to begin to tackle your debt load. For example, could you reduce expenses, sell assets or increase income? If you are divorced, could you seek more alimony or child support?
  • Negotiate with creditors: You may be able to negotiate better terms with your creditors like lower monthly payments or reduced interest rates. If your mortgage is the problem, you might be able to refinance or negotiate better terms with the lender. State and federal foreclosure relief programs may offer answers. Although you may be able to ultimately save your home through bankruptcy, you may decide that a short sale on your home makes more sense for you.
  • Debt counseling: A reputable, qualified debt counseling agency may be able to assist you with budgeting and negotiation with creditors and lenders.
  • Chapter 13 bankruptcy: For a debtor with regular income, Chapter 13, also called reorganization, allows the development of a court-approved repayment plan for three to five years under which debts are paid, sometimes with reduced monthly payment amounts. Remaining debt may be dischargeable. While Chapter 13 may also affect your credit rating negatively (on credit report for 7 years), some people want to and are able to pay down debts as much as they can this way. Chapter 13 may be an option that allows a business to continue operation, rather than liquidating assets and closing shop under Chapter 7.

A knowledgeable bankruptcy lawyers near me can advise you about all of your alternatives to help you decide what action to take to begin to improve your financial situation.