Imagine you were sick. Really sick. Sick enough to go to a doctor or even a hospital. Perhaps you even looked up your symptoms on the Internet, visited WebMD, did a ton of internet research and were convinced that you needed a professional to help you get better – or things could get much, much worse.
You have a big decision to make. Who are you going to trust to provide the expert advice you need to get well? A big decision, indeed.
But, instead of finding a doctor who had lots of experience with different kinds of illnesses, you decide to go to, say, an acupuncturist. Further, you decide not to look any further, and not to seek a second opinion. You might get the right answer, but perhaps not. Does this make any sense as a way to cure your illness?
Well, that’s exactly what a lot of people do when it comes to solving their serious financial problems. They go to one problem solver who only knows, or is only able to provide, one solution. Therefore, that’s the solution that this professional will recommend to almost everyone who seeks his or her advice. And, remember, this person earns a living by providing the solution that he recommends.
When it comes to debt relief options, there are a number of choices – but it can be a difficult task to determine which option is truly the best for your situation.
Credit counselors always seem to recommend credit counseling as the best solution to anyone’s problems. Sometimes they go so far as to make blanket statements like “bankruptcy is always a bad idea and should never be considered by anyone for any reason.” We all know this is false.
Debt management programs always seem to recommend their particular program as the cure for all financial problems.
Debt settlement companies do the same thing.
And bankruptcy attorneys are no different. They always seem to recommend some kind of bankruptcy as the answer.
None of this is surprising. Credit counselors, debt management program salespersons and the debt settlement companies are not attorneys. They are not trained in the law, and not permitted to give legal advice. Therefore, it is impossible for them to advise anyone about legal options in bankruptcy – beyond just generalities.
Almost no attorneys are actually certified credit counselors. Nor are they typically debt management specialist, and most of the time they have no knowledge of, or interest in, their clients’ credit recovery or credit score after bankruptcy. Lawyers tend to focus only on the legal tasks, the chapter 7 or Chapter 13 bankruptcy, and look no further and provide no further support for credit rebuilding and credit score correction.
And, most attorneys are not bankruptcy specialists. It is an interesting fact that bankruptcy is not on the bar exam! An attorney need not even take a single class in bankruptcy law to become a practicing lawyer.
If you have a serious financial problem, you should consider all your options – not just the first (or only!) one suggested to you. Here are the basic options that you should investigate if you are trying to solve a difficult debt problem. Finding the right option is critical to your success.
The stakes are high. Consider this:
If you choose credit counseling when you should be in a debt settlement program or bankruptcy, you’ll waste considerable time and money, fall behind on your payments and further damage your credit score.
If you choose debt settlement when you should be in a bankruptcy or debt management program, you could end up being sued, your wages garnished and have liens put on your property.
If you choose bankruptcy when you should be in a debt management program, you will forfeit, for a time, your ability to file a bankruptcy should the need arise, which is a very important right, and perhaps do more damage to your credit than is necessary.
If you choose the wrong kind of bankruptcy for your needs, you may end up losing property that you could’ve kept, or end up paying more for credit purchases later because of inadequate counseling for your financial recovery after bankruptcy.
Just as you wouldn’t want to blindly accept the first treatment option offered for a serious illness without considering other possibilities, you should review the different options available to resolve difficult debt problems before making any final decision.
Six Options for Debt Relief
Credit counseling is useful if your financial problems are not too serious. Oftentimes if spending is controlled then the problem can be contained and finances improved.
Credit counselors are helpful if a person has never really had a budget, has no idea how much money is coming in or going out, and is generally clueless about his own financial situation.
A lot of people fall into this category, as we are generally not trained in school to construct household budgets and many of us start our adult lives not even knowing how to balance a checkbook. For folks in this category, credit counseling may be the right answer.
Debt management programs serve as go-betweens for consumers and their creditors, arranging payment plans and sometimes negotiating lower payments or even lower balances. Many of the more reputable and established debt management programs have long-standing relationships with creditors and can fairly accurately predict what kind of a settlement they may be able to obtain and what a person’s monthly payment will be in the debt management program.
On the other hand, there are many unscrupulous debt management programs that cause more harm than you can imagine. Remember, creditors are not required to participate in these programs and the debt management programs are not attorneys.
They cannot defend you if the creditor decides to file a lawsuit. You cannot rely on a debt management program to successfully negotiate with all creditors – some creditors simply refuse to participate.
Debt settlement is an approach that is different from debt management. Debt settlement firms work like this: a consumer turns over his or her bills to the debt settlement company. The consumer pays the company a monthly fee but the company doesn’t pay the creditors. The money is held in trust by the settlement company.
Then, all payment to creditors is withheld pending some kind of negotiated settlement. The settlement is then paid in lump sum. Oftentimes these debts are not paid for months. Frequently, these debts are transferred from the original creditor to collection agencies.
In fact, it is rare for the original creditor to settle debts. The debt collectors generally have more authority to settle a debt than an “in house” collector working for the original creditor. Again, there’s no guarantee that any creditor will settle the debt although oftentimes they do and settlements as low as 25% are sometimes achieved.
Don’t forget the Tax Implications (for non-bankruptcy options)
Remember that in both debt management and debt settlement when the creditor writes off any of your debt, i.e. agrees to take less than the contractual balance due, then the amount written off is reported to the IRS. You will get a 1099c form at the end of the year have to pay tax on the amount of the debt that is written off.
Therefore, the actual savings that you realize by debts written off in a debt management or debt settlement program is actually less, effectively, than the amount it’s written off, due to the tax obligations. However, debt discharged in any form of bankruptcy is not taxed at all.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is often referred to as a straight bankruptcy, consumer bankruptcy, or liquidation bankruptcy. But you don’t necessarily lose anything, i.e., seldom is anything “liquidated,” in a chapter 7 bankruptcy. This is because there are protections called exemptions, which allow consumers to keep property up to certain values in a chapter 7. Losses of property in Chapter 7 are actually rare, and when they occur, it is generally because the consumer makes a decision to let the property go back to the creditor because it’s in the consumer’s best interest to do so.
Chapter 7 is not a payment plan, all the unsecured debt that is legally dischargeable is erased with no payment whatsoever and the consumer gets a fresh start. Most consumers keep one or more cars and if they are purchasing their home, they often keep that as well. Not all debts are discharged. Child support is not discharged and student loans are sometimes discharged, but often survive discharge and are still owed after the bankruptcy is over.
Not everybody qualifies for chapter 7. And, some who qualify for Chapter 7 get a much better result in Chapter 13. If the consumers’ household income is over certain amount, then a “means test” analysis must be performed to determine whether or not that consumer is eligible file chapter 7.
Nevertheless, many consumers who have income over the median income are able to file chapter 7. There are several means test calculators available online, however, it is important to remember that this is an area of law where it is easy to get the wrong answer if you don’t know what you’re doing.
An experienced bankruptcy attorney should be consulted to determine whether or not you are eligible to file chapter 7 if your income is near or over the median income for your household size.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a payment plan. Most people think of a chapter 13 as that kind of a bankruptcy where they pay all of their debts through chapter 13 bankruptcy trustee. This is partially true, but partially misleading as well.
In many cases, all of the debt does not get paid. In fact, many Chapter 13 plans only pay back a single penny on the dollar. These are referred to as 1% plans. Plans range from 0% to 100%. Even 100% plans offer many benefits to consumers, like paying 0% interest on unsecured debt and reducing the interest rate on secured debts for cars to approximately 4.75%.
The main reason that people file chapter 13 is to save property from foreclosure or repossession. If the consumer is behind on his house payment, even if the home is already in foreclosure, or if a car has been repossessed, or is about to be repossessed, then a chapter 13 bankruptcy will allow that consumer 36 to 60 months to catch up the missed payments and keep the property. Chapter 13 is a great way for consumers to recover from temporary losses in income without losing any property whatsoever.
Chapter 13 bankruptcy is much more complex, in most cases, than chapter 7, and many attorneys who practice chapter 7 bankruptcy law are inexperienced in and actually decline to represent people in chapter 13.
Because the chapter 13 plans extend for 36 to 60 months, it is important to select an experienced attorney who has a well-established office with sufficient staff to take care of the consumer’s needs. Chapter 13 is a long-term relationship between the consumer and the attorney.
The do-nothing option doesn’t sound like an option at all, does it? What kind of an option is doing nothing? Well, as it turns out, it’s a very viable option for many people.
If a person has just lost his or her job, and has no paycheck, and if that person has no property that creditors can repossess or foreclose, that person might be judgment proof. Therefore, no protection from creditors as necessary. Because he has no ability to pay, there really is no option to pursue debt settlement, or debt management. A Chapter 13 bankruptcy would not make sense either.
In these situations, the consumer simply does nothing. No bankruptcy. No debt settlement program. No payments. If the creditors sue, they can obtain judgments, but they cannot collect the judgment.
In these situations, if it is anticipated that the judgment-proof status will end in the foreseeable future then the consumer should be making a plan to determine which form of debt relief would be appropriate when the income resumes and the judgment proof status ends.
In other situations, particularly retirement situations, the older consumer may be on a fixed income; retirement, or Social Security. These forms of income that are protected by law. So, it may be that the judgment proof status will extend until the end of the consumer’s life. In this case, the consumer might just explain to his creditors that he is judgment proof – cannot pay – and does not intend to file bankruptcy or seek any other form of debt relief program.
How to make the right decision
As you can see from the foregoing, there are a number of options available to address consumer debt problems. How do you make the right decision?
The first thing you want to do is roll up your sleeves and gather your own data. You need to have an accurate understanding of your income from all sources. You need to know exactly how much you have to spend every month for living expenses. Essentially, you need an accurate budget. Then, you need to make a list of all of your debts, the monthly payments and the balances. This will give you a starting point.
Next, familiarize yourself with the details of the different options so that you will have an idea of how they work. The Internet is a great place to start, but it’s important to remember that not everything on the Internet is what it appears to be. In other words, you need to carefully consider the source of information that you are reviewing.
When you know where you stand financially and what your possible options are, then the next step is to review your situation with the appropriate professional. This is where it gets tricky.
If you can find one professional
It will be great if you can find one single person, one office, one counselor, who could accurately review with you all of the above options, apply them to your situation, explain the pros and cons and then make a recommendation for a solution.
Well, it would be great, but the problem is, as discussed at the beginning of this article, most of the professionals that you will find are not trained, experienced, and licensed to provide an accurate comparison of all the different debt relief options.
Ideally, you will find a seasoned and experienced debt relief attorney, one who knows the ins and outs of the non-bankruptcy and the bankruptcy approaches and will honestly tell you which is best for you. There are such attorneys, but they are few and far between.
If you cannot find one single professional
If you cannot find one single professional to accurately assess all of your options then you’ll need to visit several. This is what most folks end up doing. You can discuss your situation with different counselors, debt management programs, debt settlement companies, and visit one or more attorneys, and then after you have completed your research you’ll need to make the decision yourself.
It’s not as hard as it might seem at first, because once you have honestly taken stock of where you’re at financially, listed and reviewed your income and expenses and what your total debts are – and talked to several professionals, a picture should emerge.
It will be pretty clear, in most cases, that one approach is superior to the others. Once you have settled on the solution that best suits your needs, then it’s simply a matter of finding a professional that you feel comfortable with and trust to help you carry out the program.
There is no shortage of information about different ways to handle consumer debt. In fact, there are more resources available, more companies available, and more counselors available than ever. The problem is determining which is the best solution for your needs.
By putting your financial information down on paper, and then going through the above checklist of different types of debt relief options, and seeking professional counsel from one or a number of counselors, it should be easier to determine which solution is best for you.
Richard West is a Board Certified Consumer Bankruptcy Specialist, Certified Credit Counselor, Debt Arbitrator and Certified Student Loan Specialist. He has been a bankruptcy attorney in Dayton Ohio for thirty years, helping his clients overcome debt problems, rebuild credit and correct errors on their credit reports.
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