Although bankruptcy is often a solution to a debtor's problems, bankruptcy is not always the best solution. Although bankruptcy is almost always available, it may not always be needed.
One alternative is to fight disputed debts. If a creditor sues you for a payment on a debt you don't believe is justified, you may be able to defend against the creditor's action.
There may sometimes be a real dispute about whether a debt is owed. For example, a home improvement contractor may arrange a mortgage loan to pay for the job but then do shoddy work or not complete the job. Similarly, there may be misrepresentations in a transaction to buy a car or to finance some other major purchase.
In such cases, the solution may be to fight the debt in court. Of course, unless free legal counsel is available, the costs of such a lawsuit may be considerable. If the debt is large enough, though, it may be worth the investment to obtain a fair settlement. In many cases where a consumer protection statute is violated, the creditor may be required to pay the debtor's attorney if the debtor ultimately wins the case or obtains a favorable settlement.
If a debt is not disputed, some of the other alternatives to bankruptcy include:
- Working out informal payment agreements with creditors. If your debts are relatively small, you may be able to enter into agreements with your creditors and avoid a bankruptcy proceeding. Nonprofit credit counseling agencies can usually assist in working out such arrangements.
- Refinancing debts. A debtor may be able to arrange a debt consolidation loan that will allow him or her to pay bills as they fall due. Although a debt consolidation loan does not eliminate any of your debt, the new loan may have a longer maturity and be at a lower interest rate than the individual debts. However, debtors should be very wary of consolidating unsecured debts such as credit card debts into a mortgage loan, because in doing so they will usually transform debts that can be eliminated in bankruptcy into debts that cannot be eliminated.
- Financial assistance under state law. Often states have programs that will help you with utility or mortgage bills. Before filing for bankruptcy, you should investigate these programs.