Bankruptcy is an officially declared incapacity or impairment of ability of an individual or a business entity to pay their creditors. By the legal process of bankruptcy most debts are discharged. However, bankruptcy has the disadvantage of making it more difficult for an individual to borrow in the future. To avoid the negative effects of bankruptcy, individuals in debt have a number of bankruptcy alternatives.
Declaring a person judgment proof is an alternative to bankruptcy. Even though bankruptcy prevents a person’s creditors from obtaining a judgment against them, a creditor can attempt to garnish wages or seize certain types of property. A debtor with no assets can declare himself/herself as judgment proof, since creditors cannot initiate legal action against a debtor with no assets, because it’s unlikely they could collect the judgment.
Debt restructuring is a process that allows a private or public company – or a sovereign entity – facing cash flow crisis and financial distress, to lessen and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations. Out-of court settlements or restructurings are getting popular these days. A debt restructuring is generally less expensive and a desirable alternative to bankruptcy. The main costs related with a business debt restructuring are the time and effort to negotiate with bankers, creditors, vendors and tax authorities. Debt restructurings generally involve a reduction of debt and an extension of payment terms.
Debt consolidation is yet another alternative to bankruptcy. Debt is a crisis if the interest payments are greater than the debtor can afford. Debt consolidation typically involves borrowing from one lender (normally a bank), at a low rate of interest, adequate funds to pay back 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 making their monthly budget simpler. In addition, the lesser interest rate means that more of the debtor’s monthly payment is used against the principal of the loan, ensuing quicker debt repayment. It may be essential to have a co-signor or other security, such as a vehicle, if the borrower’s credit is not adequate on their own.