Bankruptcy can be avoided for many people with regular income because creditors have an incentive to avoid the bankruptcy court due to the cost of litigation and the potential for unfavorable rulings in favor of the debtor.

 

The basic method for avoiding bankruptcy is to eliminate or alter overly burdensome debt by direct negotiation with the creditors. As a general rule, credit card debt with double digit interest rates is where most people should begin. To eliminate costs, it may be advantageous for anyone to call and express their problems with creditors and attempt to get the interest rates in line as a first measure. The goal should be to eliminate any further spending with the card, and then to get the interest and principle payments in such position that you can pay a flat amount and get the card to zero over time.  A good measure may be to calculate to zero over a period of 18 months to three years.

 

If direct negotiation fails and insolvency is looming, an attorney should to be consulted. It may be possible for the debtor to establish an escrow that will be set up outside of the bankruptcy court or merely supervised by the U.S. Trustee. In that instance, a single payment will be made (monthly or bi-weekly) to the escrow agent by the debtor, and this single account will be set up to pay mortgage, car, and other credit (credit cards included). If the terms of the escrow are followed, much of the debt will be eliminated over time. This is a good option as it avoids an official bankruptcy filing, so long as you budget properly and can fund the account. 

 

The primary reason for having a law firm perform this service is that in the event that any creditor should be unreasonable, the firm may have the ability to litigate, and the unreasonable conduct of any creditor may adversely affect them in the eyes of the court. Lawyers are in the only position to do this. There is little motivation for creditors to give any real concessions to non-attorney debt relief agencies. Further, these agencies often times cost more than experienced attorneys.

 

A primary advantage of not filing bankruptcy is avoiding negative credit. This, however, needs to be taken with a grain of salt. A bankruptcy filing will affect the credit of someone who has good credit. However, bankruptcy may have a neutral or even beneficial effect on someone with bad credit and a large number of open accounts or judgments. The overall effect of a workout as opposed to bankruptcy needs to be balanced on an individual’s current state of credit and need for future credit. It is dishonest to say that bankruptcy has no effect on credit, but it is equally true that failing to file bankruptcy may have a far more permanent and devastating effect on a person’s life.