Alternatives to Chapter 7 Bankruptcy

According to a Wall Street Journal article dated January 7, 2010, personal bankruptcy filings for 2009 rose by almost a third compared to the prior year, and a growing proportion of these bankruptcies are Chapter 7 filings. These numbers appear to make a farce of the much-heralded 2005 bankruptcy law reforms that were intended to accomplish two goals: first, to make filing for bankruptcy more difficult and thereby reduce the overall numbers, and second to cause more filers to choose a Chapter 13 bankruptcy and by doing so, to have to commit to a repayment plan.

Whether this failure is a result of poorly written bankruptcy law or simply an inescapable consequence of the severe downturn in the economy at large is currently the subject of intense debate. The 2005 reforms has its share of critics among legal scholars, and no one would argue that the spike in foreclosures and job losses doesn’t contribute directly to the bankruptcy numbers. But regardless of the outcome of that debate, Americans are turning to bankruptcy as a debt solution much too often and very likely are overlooking the benefits of credit counseling and a debt management plan (DMP) or a debt settlement program as less drastic and possibly more appropriate debt solutions.

Photo by noaz.

Filing bankruptcy has such a steep downside that only the most severe debt problems will warrant its use. Personal bankruptcy will stay in your credit history for 7 years and its effects on your credit score can last for as long as 10 years. In contrast, a DMP will have no effect at all on your credit score, and a successful debt settlement program will likely impact your credit score for a shorter time and with less severity than bankruptcy. And although your debts will not be discharged as they are in a Chapter 7 bankruptcy, for many consumers there is a compelling case that can be made for using either a DMP or debt settlement instead. Your debts can be fully paid off in just a fraction of the time it would normally take and you credit score will either suffer less (debt settlement) or not at all (DMP).

In short, it is advisable to speak with a reputable debt solutions provider, before making the decision to file for bankruptcy. You may discover that, as vehicles that enable you to get past the financial hardship you may be facing, options such as a DMP or debt settlement may ultimately make more sense for you than bankruptcy.