Discuss the alternatives to bankruptcy that were discussed in Chapter 15

Question

What will be an ideal response?

Answer 1

A client who has little or no assets or income is judgment proof. This means that even if creditors sue the debtor and obtain a judgment, collecting the debt will be impossible because the debtor has no property to attach or wages to garnish.

Instead of filing for bankruptcy, it is possible for some debtors to negotiate some form of compromise with creditors, the effect of which provides the debtor with some relief and assures the creditor of some payment. A debt settlement is a lump sum payment to the creditor, from 30% to 50% of the total debt, in satisfaction of the entire obligation. Instead of pursuing a bankruptcy case, the attorney may represent the debtor in the negotiation process rather than the debtor having to deal with aggressive collection agencies or creditors' attorneys. Some debtors seek the assistance of debt management agencies in negotiating a debt settlement.

In contrast, debt consolidation is a bankruptcy alternative that requires the debtor to obtain a large loan to pay off existing debts. The debtor is left with one loan payment, usually at a lower interest rate than those on the multiple debts originally owed. Loans extended as part of debt consolidation are secured, meaning that an asset must be pledged as collateral. A debtor who has numerous credit card debts, for example, may consolidate her debt by obtaining a large loan, secured by her home, which she will use to pay off her credit cards. If she defaults, however, she can lose her home.

In addition to negotiating a payment plan with creditors, debtors may be encouraged to create a budget and reduce expenses. They may be able to eliminate unnecessary expenses and readjust their lifestyle to make ends meet. Budget assistance may be provided by courses on the Internet, adult education classes, credit counseling services, or a financial professional.