Beware of Do Nothing Bankruptcy

Even with filings for bankruptcy in the United States at such a high level, the average person's understanding of how bankruptcy works is suspect. For one, some people might believe that declaring bankruptcy automatically equates to having no money or other assets. However, this is not necessarily the case.

Bankruptcy is more of a manifestation of an individual debtor's inability to meet their regularly-scheduled payments to creditors, or in some instances, a willful disinclination to keep up with lenders. Plus, as regards reorganization plans represented by Chapters 11 through 13 of the Bankruptcy Code, debt restructuring is often the best option. Some notes about doing nothing as an alternative to bankruptcy:

Before we begin, it should be stressed that people should not openly disregard their debts as a means of evading bankruptcy. After all, ideally the best solution one could list under the category of "bankruptcy alternatives" is to be reasonable about one's ability to pay off credited funds before charging items to a credit card or taking out additional loans, and whenever possible, to pay bills on time. That said, unexpected changes to an individual's financial situation giving way to persistent low income may serve as somewhat of a mitigating factor. In general, doing nothing as an alternative to bankruptcy is usually only feasible for those people seen by creditors as "judgment proof," meaning they have very little in the way of viable properties for liquidation and distribution to creditors.

Besides this, regardless of whether debtors are actually filing for bankruptcy or entreating various bankruptcy alternatives, there are some assets that may be more than just imprudent for creditors to seek; it may be downright illegal to go after certain possessions.

As listed under the Bankruptcy Code, there are a number of exceptions to what may be collected by creditors pursuant to their interests, known commonly as "exempt property." Moreover, while wage garnishment is possible, there is a limit to the percentage of each paycheck which may be taken out to satisfy a creditor’s claims.

As noted, though, compared to other bankruptcy alternatives, doing nothing may be a tenuous proposition. Even if it makes little sense for a creditor to go through the rigors of bankruptcy court to try to collect on delinquent debtors, they may still opt for a lawsuit and judgment instead. Also, the decision to let debts to creditors remain is not likely to bode well for one's credit rating, so people who employ this alternative to bankruptcy should plan to make living simply their raison d'être. In addition, in the event the insolvent party does wish to repay their debts down the road, unseen rises in interest rates and even the standard compounding of interest may dramatically increase the total amount owed by the debtor in a short time.

NEXT: Know the Benefits of Debt Consolidation