It was a hard conversation to have. The woman standing across from me was telling me about the fact that she knows she should have filed bankruptcy years ago. A divorce fraught with high emotions and deeply entangled finances had left her with next to nothing except for huge piles of debt. She had done everything in order to protect her sole custody of her child, including giving up her house and all the money that she had put into the house.
Over the past years, she had sought to pay back the attorney fees incurred for that divorce case but was still struggling. Now, unable to pay her rent, she had faced the truth and the reality: she needed to file for bankruptcy.
In this day and age, almost every person you know or meet has dealt, or is dealing, with “debt.” Getting out of debt can be difficult. If it was easy, no one would have it. Those struggling under huge amounts of debt often feel powerless, which can make the process of freeing oneself from debt even more difficult.
Struggling with Your Debt?
Those struggling with debt are often quick to utter the next “big term” – “Bankruptcy.” But if you are already floating that word around, just know there are other options, including the “workout” option. Below we discuss what this is, how to discern if you’re eligible for it, and what steps to take.
“Workout” That Debt
Sometimes a debtor does not need to go through the process of bankruptcy to settle the debt that they owe to creditors. Instead, they can choose a workout. The term “workout” is used to describe a mutually-negotiated modification of debt that does not involve filing for bankruptcy. In simpler terms, a workout is an out-of-court agreement between a debtor and a debtor’s creditors to settle the repayment of any back-owed debt. Workouts are negotiated without all the procedures typically involved in the bankruptcy process.
While this is an alternative to bankruptcy, that does not mean you can just avoid your debt. As always, you’ll want to work with an experienced bankruptcy attorney to help guide you through the process. A phoenix chapter 7 bankruptcy lawyer will be able to advise you on if a bankruptcy workout or a bankruptcy will be the best course of action.
When to Consider “Workout”
There are a lot of reasons for why a debtor would prefer a workout to bankruptcy. Often times people have a stigma attached to “bankruptcy.” For this reason, a workout allows a debtor to “avoid bankruptcy,” but still achieve the same outcome – discharging either all or a portion of his or her debts. A debtor and the creditor voluntarily enter into the workout, which can make the process easier.
A workout might actually be a better option for some – especially in the case where a debtor might need to file a future bankruptcy. Certain forms of bankruptcy discharges restrict a debtor’s ability to file again.
Workouts are sometimes called compositions or extensions. Here’s a quick overview of what those are:
A “composition” is a contract between a debtor and two or more of his or her creditors in which the creditors agree that they will take a partial payment of debt to satisfy all claims.
An “extension” is a contract between a debtor and two or more of his or her creditors in which the creditors agree to extend the time for re-payment of their claims.
The two are not mutually exclusive, so a debtor can receive both a composition and an extension. This means that a creditor might agree to accept less money (a composition) over a longer period of time (an extension).
Creditors do not always agree to compositions or extension, but a majority of a debtor’s creditors must voluntarily agree to it for it to work. If a creditor does not agree to the workout they will need to pursue other options to collect the debts owed to them.
An “assignment” is another option available for small businesses that are looking to be liquidated. In this action, a debtor will assign all nonexempt property to an assignee who acts as a fiduciary for the benefit of creditors. The assignee will then proceed to liquidate assets and distribute proceeds pro rata among creditors who have filed claims with the assignee. An assignment is voluntary, but all creditors must accept it for it to work.
Forms of Bankruptcy to Consider
If you’re facing large amounts of debt, have ruled out a workout or are not eligible for a workout, you will want to consider bankruptcy. You’ll also want to have an understanding of the types of bankruptcy available to you.
What Type of Bankruptcy Should You File For?
Most people have heard of Chapter 7, Chapter 13, and Chapter 11 bankruptcy. Since Chapter 11 bankruptcy is usually for businesses, we’ll focus on Chapter 7 and Chapter 13. Please do not hesitate to contact us though, if you are interested in learning more about Chapter 11 bankruptcy, which is also known as “reorganization bankruptcy.”
Chapter 7 is the most common form of bankruptcy and is commonly referred to as “straight bankruptcy.” Under Chapter 7, assets are sold off so that the proceeds can go to paying debt. All proceeds from the sales of those assets are handed over to a trustee, who then pays down any and all creditors. After all creditors have been paid off they are no longer able to collect funds directly from you and your debts are cancelled, meaning you are no longer responsible for them. Chapter 7 is a good option for people dealing with the following:
- You unable to repay your debts
- You have debts that do not have co-signers
- You are going to be sued by creditors
Chapter 13 reorganizes debt so that you are able to pay back debts over the next three to five years. This pay-back plan is called a debt repayment schedule. Based on your income, and how much you owe, you’ll repay 10-100% of the debt you owe. Chapter 13 is a good option for people dealing with the following:
- You have already filed Chapter 7 within the past six years
- You have debts that have c-osigners
- You are able to re-pay your debts within three to five years
- Your income has disqualified you from filing for Chapter 7
- You need relief from impending collection proceedings or you want to pay your creditors back but are currently unable to
Pros and Cons of Bankruptcy to Consider
As with any major decision in your life, there are pros and cons of filing bankruptcy. Below we discuss the advantages and disadvantages of filing for bankruptcy. As always, it’s advised you work with a phoenix chapter 7 bankruptcy lawyer that can help advise you.
Pros of Filing Bankruptcy
One immediate advantage that helps debtors when they file for bankruptcy is the “automatic stay.” This motion alerts creditors that they must stop their efforts to collect money from debtors. This stay is what stops creditors from calling you! Under an automatic stay, creditors are not allowed to call, send collection letters, file lawsuits, garnish wages, or seize assets – except for in specific situations such as the collection of alimony and child support payments.
The biggest “pro” of filing bankruptcy is that a court discharges your debts. That means that certain debts will not need to be repaid. This, of course, is dependent on the form of bankruptcy you file: either chapter 7 or chapter 13.
Cons of Filing Bankruptcy
One “con” of bankruptcy is that while it will discharge most debt, it does not discharge certain debt, such as mortgages, student loans, taxes, alimony, or child support. While student loan debt has been forgiven in extreme cases, for the most part, it is never discharged in bankruptcy. Additionally, a debtor can lose certain nonexempt property in a bankruptcy filing because a court orders it to be sold.
Bankruptcy will also have an affect on your credit score. While your credit might already be low because of delinquent payments, once a bankruptcy is filed, it’s required by the national credit reporting agencies that it appears on your credit report. A chapter 7 bankruptcy will stay on your credit report for 10 years and a chapter 13 will stay for 7 years.
The impact on your credit can hurt your future ability to qualify for a future loan or credit card. It might also affect your ability to be hired or secure living arrangements. Some employers and future landlords evaluate a persons credit score to determine if they are good candidates.
Working with a Bankruptcy Attorney
Bankruptcy can be an overwhelming process. That’s why we advise that you work with a phoenix chapter 7 bankruptcy lawyer that is familiar with various debt repayment options. We are committed to helping our clients understand their rights and options under the bankruptcy law and developing the debt relief solution that makes the most sense for each individual. We invite you to call (602) 648-3274 or contact our Arizona office to schedule a free initial consultation.
668 N. 44th St., Ste 320, Phoenix, AZ 85008