People who are facing severe financial difficulties often think that bankruptcy is the main way to solve their problems. While bankruptcy is certainly an option to consider, it may not be the only path to financial stability or the path that best fits your circumstances. A less drastic alternative may allow you to get out from under your debts enough to put your life back together. For example, if you are mostly concerned about harassing actions by creditors, you may want to explore your legal rights under the Fair Debt Collection Practices Act and parallel state laws. You might be able to get a creditor to stop or reduce its efforts by filing an action against it.

In other situations, a debtor who has some income or property might be able to develop a repayment plan with a creditor that allows them to pay off a debt in smaller installments. They might also be able to negotiate the debt down to a more manageable amount. Many creditors realize that they are not likely to be paid back if a debtor files under Chapter 7, since all or most of their assets likely will be exempt. This gives a creditor or collection agency some motivation to settle for a lesser amount or give you more time to pay if you think that your financial situation will improve soon.

Assistance from Credit or Debt Counseling Agencies

If you would prefer not to confront a creditor or collection agency on your own, you can consider getting assistance from a credit or debt counseling agency. These are non-profit entities that specialize in helping debtors repair their finances without filing for bankruptcy. You can find a list of agencies in your state that are approved by the U.S. Trustee under the Credit Counseling and Debtor Education section of its website. (Even if you eventually decide that bankruptcy is your best option, you will be required to complete a credit counseling course before filing.)

A credit or debt counseling agency can develop a debt management program that is similar in some ways to a repayment plan in a Chapter 13 bankruptcy. The main reason to choose a debt management program over Chapter 13 is that your credit record will not show a bankruptcy. However, you should also be aware of drawbacks to using a debt management program. You probably will need to pay back the full amount of your debts, and you will be vulnerable to collections efforts as soon as you miss a payment, whereas Chapter 13 gives debtors some flexibility.

Not every credit or debt counseling agency is legitimate. You should carefully investigate a company’s track record before signing up for its services. If an offer to settle or get rid of your debts sounds too good to be true, it probably is. More generally, credit counseling agencies have been called into question because they receive funding from creditors, which could lead to conflicts of interest.

Judgment Proof Debtors

If you have almost no assets or income, you may be judgment proof, which means that a creditor has nothing from which to collect a debt. Even if a creditor gets a judgment against you, they cannot take away basic necessities of life to satisfy it. For example, you have a right to government benefits, unemployment benefits, food, clothing, and any other income or property needed to ensure your basic health and safety. You will not go to jail for refusing to pay a debt, except in some rare cases involving child support or taxes. However, any judgment that a creditor has received against you remains valid and can be enforced as soon as you acquire assets or income from which it can collect.

Last reviewed October 2024