At Pearce & Heers, we’re often called upon to assist clients who are unable to pay all debts they owe to creditors. These debts could include credit card debts, tax debts or debt from personal guarantees for a failed company. Bankruptcy can and does result from these circumstances, but it’s important to realise that in many cases, bankruptcy might not be the only option.

So, if you’ve reached the conclusion that you cannot pay off all your debts, what exactly are your options?

Don’t leave your creditors in the dark. Negotiate a possible resolution.

The key thing to consider when faced with possible bankruptcy is that creditors know a person filing for bankruptcy often provides them with little if any return.

In many cases, an option other than bankruptcy is more likely to provide creditors with at least some benefit and as such, they are often willing to negotiate a settlement of some kind. If you only have a small number of creditors, it may be possible to negotiate settlements with each of them individually. If all or most debts can be settled, then bankruptcy can be avoided.

We have negotiated numerous settlements with creditors, sometimes securing significant discounts on amounts owed. The approach we usually adopt involves providing creditors with a full summary of a client’s financial position, often with a comparison estimate of their position if they go bankrupt. This comparison helps creditors understand that should a person file for bankruptcy there may be little or no amount paid to them.

We will then make an offer of settlement to creditors on our client’s behalf and subsequently liaise with each creditor regarding the offer, any counter-offer received and if negotiations are successful, prepare a settlement agreement.

Providing creditors with information to fully understand a person’s financial position means they are more likely to be open to negotiating a settlement of their debt for a lower amount, reducing the interest on their debt for a period, or allowing deferred payment of their debt.

Informal arrangements can often be organised quite quickly, however they require acceptance of the proposed settlement offer by all of a person’s creditors (or at least, the vast majority of creditors) to be successful. If one or more creditors reject a proposed offer, the informal arrangement may not be able to proceed. Consequently, proposing informal arrangements becomes more difficult as the number of creditors increases.

Continue to Part Two…

Part two of our article on avoiding bankruptcy discusses the most common formal alternatives to filing for bankruptcy and how to work with your creditors to reach an agreement with the most positive outcome for all parties.