Bankruptcy alternatives
Encyclopedia
Bankruptcy
is a legally declared inability or impairment of ability of an individual or organization to pay their creditor
s. In most cases personal bankruptcy
is initiated by the bankrupt individual. Bankruptcy is a legal process that discharges most debts, but has the disadvantage of making it more difficult for an individual to borrow in the future. To avoid the negative impacts of personal bankruptcy, individuals in debt have a number of bankruptcy alternatives.
can attempt to garnish
wages or seize certain types of property. However, if a debtor
has no wages (because they are unemployed or retired) and has no property, they are "judgment proof", meaning a judgment would have no impact on their financial situation. Creditors typically do not initiate legal action against a debtor with no assets, because it's unlikely they could collect the judgment.
If enough time passes, seven years in most jurisdictions, the debt is removed from the debtor's credit history
.
A debtor
with no assets or income cannot be garnished by a creditor
, and therefore the "Take No Action" approach may be the correct option, particularly if the debtor does not expect to have a steady income or property a creditor could attempt to seize.
is a result of spending more than one's income in a given period. To reduce debt, the most obvious solution is to reduce monthly spending to allow extra cash flow to service debt. This can be done by creating a personal budget
and analyzing expenses to find areas to reduce expenses.
Most people, when reviewing a written list of their monthly expenses, can find ways to reduce expenses. Common areas for expense reduction would include reducing food expenses by eating out less often, taking public transportation instead of driving a car, and eliminating enhanced telephone and cable television services.
is an option for debtors with excessive debt, so most creditors are willing to negotiate a settlement so that they receive a portion of their money, instead of risking losing everything in a bankruptcy.
Negotiation is a viable alternative if the debtor has sufficient income, or has assets that can be liquidated so that the proceeds can be applied against the debt. Negotiation may also buy the debtor some time to rebuild their finances.
For a business, a restructuring agreed with the creditors is a common approach but this requires the agreement of all creditors.
is a process that allows a private or public company - or a sovereign entity - facing cash flow problems and financial distress
, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations.
Out-of court restructurings, also known as workouts, are increasingly becoming a global reality. A debt restructuring is usually less expensive and a preferable alternative to bankruptcy. The main costs associated with a business debt restructuring are the time and effort to negotiate with bankers, creditors, vendors and tax authorities. Debt restructurings typically involve a reduction of debt and an extension of payment terms.
typically involves borrowing from one lender (typically a bank), at a low rate of interest, sufficient funds to repay a number of higher interest rate debts (such as credit cards). By consolidating debts, the debtor replaces many payments to many different creditors with one monthly payment to one creditor, thereby simplifying their monthly budget. In addition, the lower interest rate means that more of the debtor's monthly payment is applied against the principal of the loan, resulting in faster debt repayment. It may be necessary to have a co-signor or other security, such as a car, if the borrower's credit is not sufficient on their own.
Different countries have different legal procedures for compromising debts. In the United States, a debtor can file a Chapter 13 Wager Earner Plan. The plan will typically last for up to five years, during which time the debtor makes payments that are distributed to their creditors.
In Canada, a Consumer Proposal can be filed with the assistance of a government-licensed proposal administrator. Forty-five days after filing the proposal the creditors vote on the proposal, which is considered accepted if more than half of the creditors, by dollar value, vote to approve the proposal.
(IVA) represents the main formal alternative to a debtors bankruptcy petition. The IVA is part of the Insolvency Act 1986
and essentially allows a debtor to reach a formal repayment arrangement with their creditors usually over a 5 year period. In most cases the debtor does not repay their debts in full to their creditors however the IVA proposal essentially allows for any remaining debt to be written off by the creditors at the end of the 5 year repayment period. As with bankruptcy petitions the number of IVA proposals has been increasing rapidly in the UK in recent years.
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
is a legally declared inability or impairment of ability of an individual or organization to pay their creditor
Creditor
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...
s. In most cases personal bankruptcy
Personal bankruptcy
Personal bankruptcy is a procedure which, in certain jurisdictions, allows an individual to declare bankruptcy. In other jurisdictions, bankruptcies are reserved for corporations.-Canada:...
is initiated by the bankrupt individual. Bankruptcy is a legal process that discharges most debts, but has the disadvantage of making it more difficult for an individual to borrow in the future. To avoid the negative impacts of personal bankruptcy, individuals in debt have a number of bankruptcy alternatives.
Take no action
Bankruptcy prevents a person's creditors from obtaining a judgment against them. With a judgment a creditorCreditor
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...
can attempt to garnish
Garnishment
A garnishment is a means of collecting a monetary judgment against a defendant by ordering a third party to pay money, otherwise owed to the defendant, directly to the plaintiff...
wages or seize certain types of property. However, if a debtor
Debtor
A debtor is an entity that owes a debt to someone else. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor...
has no wages (because they are unemployed or retired) and has no property, they are "judgment proof", meaning a judgment would have no impact on their financial situation. Creditors typically do not initiate legal action against a debtor with no assets, because it's unlikely they could collect the judgment.
If enough time passes, seven years in most jurisdictions, the debt is removed from the debtor's credit history
Credit history
Credit history or credit report is, in many countries, a record of an individual's or company's past borrowing and repaying, including information about late payments and bankruptcy...
.
A debtor
Debtor
A debtor is an entity that owes a debt to someone else. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor...
with no assets or income cannot be garnished by a creditor
Creditor
A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property or...
, and therefore the "Take No Action" approach may be the correct option, particularly if the debtor does not expect to have a steady income or property a creditor could attempt to seize.
Self money management
DebtDebt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
is a result of spending more than one's income in a given period. To reduce debt, the most obvious solution is to reduce monthly spending to allow extra cash flow to service debt. This can be done by creating a personal budget
Personal budget
A personal budget is a finance plan that allocates future personal income towards expenses, savings and debt repayment. Past spending and personal debt are considered when creating a personal budget...
and analyzing expenses to find areas to reduce expenses.
Most people, when reviewing a written list of their monthly expenses, can find ways to reduce expenses. Common areas for expense reduction would include reducing food expenses by eating out less often, taking public transportation instead of driving a car, and eliminating enhanced telephone and cable television services.
Negotiate with creditors
Creditors understand that bankruptcyBankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
is an option for debtors with excessive debt, so most creditors are willing to negotiate a settlement so that they receive a portion of their money, instead of risking losing everything in a bankruptcy.
Negotiation is a viable alternative if the debtor has sufficient income, or has assets that can be liquidated so that the proceeds can be applied against the debt. Negotiation may also buy the debtor some time to rebuild their finances.
For a business, a restructuring agreed with the creditors is a common approach but this requires the agreement of all creditors.
Debt Restructuring
Debt restructuringDebt restructuring
Debt restructuring is a process that allows a private or public company – or a sovereign entity – facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its...
is a process that allows a private or public company - or a sovereign entity - facing cash flow problems and financial distress
Financial distress
Financial distress is a term in Corporate Finance used to indicate a condition when promises to creditors of a company are broken or honored with difficulty. Sometimes financial distress can lead to bankruptcy...
, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations.
Out-of court restructurings, also known as workouts, are increasingly becoming a global reality. A debt restructuring is usually less expensive and a preferable alternative to bankruptcy. The main costs associated with a business debt restructuring are the time and effort to negotiate with bankers, creditors, vendors and tax authorities. Debt restructurings typically involve a reduction of debt and an extension of payment terms.
Debt consolidation
Debt is a problem if the interest payments are greater than the debtor can afford. Debt consolidationDebt consolidation
Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan....
typically involves borrowing from one lender (typically a bank), at a low rate of interest, sufficient funds to repay a number of higher interest rate debts (such as credit cards). By consolidating debts, the debtor replaces many payments to many different creditors with one monthly payment to one creditor, thereby simplifying their monthly budget. In addition, the lower interest rate means that more of the debtor's monthly payment is applied against the principal of the loan, resulting in faster debt repayment. It may be necessary to have a co-signor or other security, such as a car, if the borrower's credit is not sufficient on their own.
Formal proposal to creditors
If the debtor cannot deal with their debt problems through personal budgeting, negotiation with creditors, or debt consolidation, the final bankruptcy alternative is a formal proposal or deal with the creditors.Different countries have different legal procedures for compromising debts. In the United States, a debtor can file a Chapter 13 Wager Earner Plan. The plan will typically last for up to five years, during which time the debtor makes payments that are distributed to their creditors.
In Canada, a Consumer Proposal can be filed with the assistance of a government-licensed proposal administrator. Forty-five days after filing the proposal the creditors vote on the proposal, which is considered accepted if more than half of the creditors, by dollar value, vote to approve the proposal.
Individual voluntary arrangement
In the UK the Individual Voluntary ArrangementIndividual Voluntary Arrangement
In the UK, an Individual Voluntary Arrangement is a formal alternative for individuals wishing to avoid bankruptcy.The IVA was established by and is governed by Part VIII of the Insolvency Act 1986 and constitutes a formal repayment proposal presented to a debtor's creditors via an Insolvency...
(IVA) represents the main formal alternative to a debtors bankruptcy petition. The IVA is part of the Insolvency Act 1986
Insolvency Act 1986
The Insolvency Act 1986 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.-History:...
and essentially allows a debtor to reach a formal repayment arrangement with their creditors usually over a 5 year period. In most cases the debtor does not repay their debts in full to their creditors however the IVA proposal essentially allows for any remaining debt to be written off by the creditors at the end of the 5 year repayment period. As with bankruptcy petitions the number of IVA proposals has been increasing rapidly in the UK in recent years.