But let me quickly point out that there are several bankruptcy alternatives that I personally don’t like much. Any alternative that pulls money out of an otherwise exempt asset (like a homestead, or a 401(k)), is one I don’t favor. If a subsequent bankruptcy is needed, the base for the fresh start has already gone away, and that makes me sad when I see it.
Putting it another way, I don’t like to see someone borrow against their homestead to pay credit card debts, particularly if they are no longer young. That’s just a preference of mine, not a legal conclusion.
One practical alternative, which can sometimes be a good idea, is to do nothing at all.
Let me try that again. There are two ways to do nothing at all about creditors, and one is as a decision reached after thought and consideration. The other way to do nothing is “deer in the headlights syndrome”. The second way is bad.
The first way, the “thoughtful” doing nothing about debt, is an acceptable option if there is nothing of consequence that creditors can do to you. For instance, if Jimmy is living at home with his parents, and Jimmy is 36, and has accumulated a lot of debt, and Jimmy owns nothing, it’s possible that the do-nothing approach is okay.
After all, Jimmy has no income to garnish. He has no jet-ski to grab, no dirt to foreclose. Jimmy has some clothes, but they have the advantage of being exempt (and all used clothes tend to be exempt, because used clothes tend to have a value less than $500, which is the current exemption for clothing in Arizona).
If Jimmy’s furniture (which would normally be exempt in any case) is all owned by his parents, and Jimmy is merely a pet, from an economic perspective, he’s a hard guy to collect from.
For a more typical couple, who have a house, and a car, with a mortgage and a lien, and a lot of credit card debt, and a couple of incomes, doing nothing when they can’t pay their debts is not a very good alternative. Creditors can make their lives difficult by calling, writing, suing, garnishing after they have a judgment in Arizona, initiating a trustee’s sale, and taking back the car. Doing nothing can turn them into shopping cart people, which is a bad alternative.
For them, the only (barely) practical bankruptcy alternatives are called extensions and compositions.
Those are just lawyer words for paying what you owe over a longer period of time than previously agreed, or paying less than previously agreed. In a consensual arrangement.
And even that sounds more complex than it is.
The couple with assets but inadequate income to service debt on a timely basis can attempt (with or without help) to set up a payment stream to creditors that it CAN pay.
If creditors will agree to the deal. And that’s always the problem.
A composition is a similar approach, although instead of trying to get a creditor to accept a smaller payment stream over time, the debtor tries to get the creditor to accept what is usually a one-time payment in full satisfaction of the debt.
And the difficulty with both compositions and extensions is similar; creditors have to agree to play along.
In my experience, the 80/20 rule applies to creditor negotiations; so if there are a lot of creditors who have to agree to a repayment plan, over time or a lump sum payment, the odds of the extension or composition working well are not great, because most or all of creditors have to agree to a workout agreement of whatever kind for the workout to…well, work out.
But neither an extension or a composition work if the debtor spends more money than the debtor can afford to spend, so part of the analysis needs to be whether the debtor can learn to live on a budget. Not much fun.
Bankruptcy alternatives for businesses are exactly the same; there are extensions and there are compositions, and those tend to have a better chance than ordinary consumers, because a business has the ability to hire number crunchers to put together plans that will make sense to creditors.
Creditors, after all, just want money (there are exceptions, but normally they want money, not revenge). Because they just want money, if you can convince a creditor that he’ll get more out of your proposed plan than by pursuing collections procedures, the creditor will become your biggest fan.
Surprisingly, one of the easiest ways to start a composition or extension process is to fill out bankruptcy forms; creditors know how to read them (and if they don’t now, they will as we move farther into this depression), and creditors need to know what the alternative is to make a rational economic decision whether to accept a proposed debtor plan, whether in or out of Bankruptcy Court.
And never even consider a composition or extension or accord and satisfaction (another alternative provided in the Arizona Statutes in connection with a disputed debt) without consulting your tax adviser on debt forgiveness consequences.
Learn more about bankruptcy alternatives in Arizona by visiting our blog.
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