(see also: Dealing with debt collectors,  How to make a budget and stick with it)

Alternatives to Bankruptcy

What you can do instead of filing for Chapter 7 or Chapter 13 bankruptcy if you are having financial difficulties.

In reviewing your financial situation you should consider what your financial situation will likely be in 5 years under whatever approach you are considering and what your life will be like during those five years.

What If I Do Nothing?

Like many questions the answer to this question depends upon several things – what kind of debt you have, what kinds of property you have, what is your income, is there a chance you will have other property in the future, what state you live in, etc.

If you're living simply, with little income and property, and look forward to a similar life in the future, you may be what's known as "judgment proof." This means that anyone who sues you and obtains a court judgment won't be able to collect from you simply because you don't have anything they can legally take. (As a famous song of the 1970s said, "freedom's just another word for nothing left to lose.")

Except in unusual situations (being a tax protester, failing to answer questions asked pursuant to a judgment about your property or willfully failing to pay child support) you can't be thrown in jail for not paying your debts. Nor can a creditor take away such essentials as basic clothing, ordinary household furnishings, personal effects, food, or Social Security, unemployment, or public assistance benefits although a creditor with a judgment may well be able to garnish your bank account so you may have to keep your money out of the bank (wages deposited into a bank account are no longer wages but simply cash in the bank).

So, if you don't anticipate having a steady income or property a creditor could grab, bankruptcy is not essential (each state has “exemption” laws that set out certain property that creditors cannot take from you to satisfy a judgment against you). Your creditors can continue to harass you to collect the debts but they probably won't sue you unless you own a home, because it's unlikely they could collect the judgment (you should learn your rights under the Fair Debt Collection Practices Act and your state consumer protection laws to protect yourself from harassment). Instead, they will eventually write off your debt and treat it as a deductible business loss for income tax purposes (they can send you a Form 1099 - Miscellaneous Income statement telling IRS that you received income from the “forgiveness” of debt but you may submit a balance sheet along with your tax return to prove to IRS that you were insolvent at the time and thereby avoid additional taxes). In several years, the debt will become legally uncollectible under state law (called the statute of limitations). And in seven years, the debt should come off your credit record (if they do not take it off after 7 years you must pursue your rights under the Fair Credit Reporting Act).

Stop Harassment from Creditors

If your main concern is that creditors are harassing you, bankruptcy is not necessarily the only way to stop the abuse. You can hang on to your bankruptcy option but still get creditors off your back by taking advantage of federal and state debt collection laws that protect you from abusive and harassing debt collector conduct.  Dealing with debt collectors

Negotiate With Your Creditors

If you have some income, or you have assets you're willing to sell, you may negotiate with your creditors rather than filing for bankruptcy. Negotiation may buy you some time to get back on your feet, or you and your creditors may agree on a complete settlement of your debts for less than you owe. In particular, if you are behind on a mortgage issued by Fannie Mae or Freddie Mac, your lender is encouraged to try to work out an arrangement to avoid foreclosure or your filing for bankruptcy.  Your credit report may continue to show adverse items unless you also negotiate the change of how the debt is reported.  You should attempt to negotiate with all creditors at the same time to avoid using the assets you have to settle only a few of your debts.

Get Outside Help to Design a Repayment Plan

Many people can't do a good job of negotiating with their creditors or with collection agencies. Inside, they feel that the creditors and collectors are right to insist on full payment. Or the creditors and collectors are so hard-nosed or just plain irrational that the process is too unpleasant to stomach.

If you don't want to negotiate on your own, you can seek help from a nonprofit credit or debt counseling agency such as Consumer Credit Counseling Service (www.nfcc.org) or Myvesta.org (formerly Debt Counselors of America) (www.myvesta.org). These agencies can work with you to help you repay your debts and improve your financial picture.

Debt Counseling vs. Chapter 13 Repayment Plans

Participating in a credit or debt counseling agency's debt management program is like filing for Chapter 13 bankruptcy. But working with a credit or debt counseling agency has one advantage: No bankruptcy will appear on your credit record.  There will be negative items remaining on your credit report however and those items will continue to be problems for you in the future until they become old enough to drop off.

However, a debt management program also has two disadvantages when compared to Chapter 13 bankruptcy. First, if you miss a payment, Chapter 13 protects you from creditors who would start collection actions. A debt management program has no such protection and any one creditor can pull the plug on your plan. Also, a debt management program plan usually requires that your debts be paid in full. In Chapter 13 bankruptcy, you often pay only the portion of your unsecured debts that you can afford to pay.

Consumer Concerns With Debt Counseling Agencies

Critics of credit and debt counseling agencies point out that they get most of their funding from creditors. Critics claim that counselors cannot be objective in counseling debtors to file for bankruptcy if they know the office won't receive any funds.

In response to this and other consumer concerns, credit and debt counseling agencies accredited by the National Foundation for Consumer Credit (the majority of agencies are) reached an agreement with the Federal Trade Commission to disclose the following to consumers:

• that creditors fund a large portion of the cost of their operations

• that the credit agency must balance the ability of the debtor to make payments with the requirements of the creditors that fund the office, and

• a reliable estimate of how long it will take a debtor to repay his or her debts under a debt management program.

This and other information is available at http://www.nolo.com.

(see also: Dealing with debt collectors,  How to make a budget and stick with it)