What Are the Alternatives to Bankruptcy in California?

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Alternatives to bankruptcy in California include debt consolidation loans, debt management plans, credit counseling, negotiating directly with creditors, and exploring legal options like loan modifications or settlements.

When you are struggling under the weight of crushing debt, it is smart to consider every possible option to get control over your finances. You have already tried to stay current by making minimum payments, but you were unable to make a dent in the balance after paying interest and fees. There may come a point that you need to look at legal remedies, and bankruptcy is a solution. However, many debtors in your position will also want to know about the alternatives to bankruptcy in California.

There are multiple options that avoid bankruptcy, but it is important to review them along with Chapter 7 or Chapter 13. You might expect that bankruptcy is a harsh remedy, thinking that other debt solutions will be better for your future. Leveraging all alternatives ensures that you can look forward to the best possible outcome.


Laws regarding debt solutions, collections by creditors, and bankruptcy are complicated, so retaining legal help should be a top priority. Your California bankruptcy attorney will advise you, but you can read on for some useful information about options.

Alternatives to Bankruptcy

When considering options for debt relief, there are some that do not require legal action in court as a bankruptcy case would. Instead, these alternatives are not official in the sense that you do not receive some of the protection offered by bankruptcy laws. For instance:


  • You might look into debt consolidation, in which you combine all debts into a single account and obtain a loan to cover them. Then, you pay back just a single lender instead of multiple creditors. The downside is that you will be paying interest on the loan. 


  • With debt settlement, you negotiate with creditors to change the terms of your credit account. Typically, you would offer to pay a lump sum to wipe out the debt for less than what you owe. This option may be tricky if you do not have significant funds saved up to pay, which could be thousands of dollars.


  • If you have a mortgage, a loan modification may be appropriate. Your goal is to alter the terms of loan so that you can afford to make monthly payments on time. This may involve lowering the interest rate, extending the term of the loan, or adding arrearages to new mortgage terms. 

How Chapter 7 Bankruptcy Works

To better understand whether alternatives to bankruptcy are the right fit for you, it is important to know what to expect if you do opt for bankruptcy. Chapter 7 discharges all qualifying debt, but there is a caveat. The bankruptcy trustee can liquidate assets to pay back creditors, meaning your real estate and personal property could be sold. However, you can use exemptions to protect assets. Plus, the trustee may not liquidate if there is little potential to make a profit. 


Chapter 7 bankruptcy includes strict criteria to qualify, and the rules are based upon your income. 


  • If your earnings are less than the state median income level, you automatically qualify for Chapter 7.
  • When your income is higher, you could still be eligible. Under the Means Test, your monthly expenses are also taken into account. 


The duration of a Chapter 7 bankruptcy case is relatively short, so you can expect the proceedings to be complete in around 4 to 6 months.

Overview of Chapter 13

If you do not qualify for Chapter 7, you may move forward with Chapter 13 as another type of bankruptcy for individuals and married couples. In fact, you might opt for Chapter 13 regardless of income because of one important factor. There is no liquidation with Chapter 13. You will still be required to pay back creditors, but you do so through a debt repayment plan. Some crucial points include:


  • As part of creating the debt repayment plan, your debts are reorganized into a single monthly payment. 
  • Through the plan, you will likely end up paying less than the total amount you owe.
  • There is one critical requirement for Chapter 13, so you must have a job to pay according to the debt repayment plan.
  • You pay the monthly payment for 3 to 5 years, at which point all qualifying debts are discharged.

Myths about Alternatives to Bankruptcy

One of the most misunderstood aspects of the non-bankruptcy debt relief options is that they seem to be a better solution compared to Chapter 7 or Chapter 13. While it is true that an official bankruptcy case will be reported to credit bureaus, it is a myth that debt solutions will not affect your credit. These debts remain until you pay the amount off as agreed when you entered into a consolidation loan, debt settlement, or loan modification. In addition:


  • Myth: Creditors cannot file a lawsuit if I opt for an alternative to bankruptcy. Not true because other creditors can still pursue you legally despite the fact that you made an agreement with one of them. With bankruptcy, you gain the advantage of the automatic stay. Upon filing Chapter 7 or Chapter 13, creditors must cease all efforts to collect.


  • Myth: Bankruptcy stays on my credit report for longer than alternatives. This is a misconception because bankruptcy cases are removed from your credit report in 10 years for Chapter 7 and 7 years for Chapter 13. However, non-bankruptcy options for debt relief will remain until you complete the terms of the agreement. You might not finish paying off for several years, while also incurring interest.


  • Myth: I will lose my home in bankruptcy. Untrue, since you can keep your home by staying current on your mortgage. Another advantage is that the automatic stay stops foreclosure. Though the lender can ask the stay to be lifted, you might gain some time to catch up on mortgage payments.


  • Myth: I can handle alternatives to bankruptcy on my own. It is a mistake to try and represent yourself with any debt relief solution. Legal help is critical when organizing debt, negotiating with creditors, drafting and reviewing documents, and finalizing agreements. If you go with bankruptcy, California bankruptcy attorneys have the experience, skills, and knowledge to help you take advantage of all benefits.

Contact a California Bankruptcy Lawyer for Additional Details

Though it is useful to know the alternatives to bankruptcy in California, you should also weigh them in the context of both Chapter 7 and Chapter 13. You might find that the benefits will serve your interests and suit your needs for resolving debt. For more information about your options, please contact Kostopoulos Bankruptcy Law. You can schedule a consultation with a California bankruptcy lawyer who will explain the pros and cons with different debt strategies.