Offering Bankruptcy Consultation to Queen Creek, AZ
Bankruptcy Alternatives
It’s natural to want to avoid bankruptcy whenever possible. Bankruptcy is often the best solution, but it isn’t the only one. The alternative solutions for debt problems boil down to debt settlement, debt consolidation, and the rather obvious option of selling your assets to pay the debt.
Selling Assets
If you don’t have any assets to sell, then this option can be immediately ruled out. If you do have assets to sell, you should consider whether those assets would be exempt in bankruptcy. It generally doesn’t make sense to sell an asset that you would be able to retain in bankruptcy while discharging the debt. For example, let’s say there’s $130,000 of equity in your house, and it’s enough to sell the house and pay your debt with the proceeds. When the equity is protected by a homestead exemption, you’re likely to be better off discharging the debt in Chapter 7 and holding on to your house.
However, let’s say there’s $250,000 of equity in your house, which exceeds the Arizona homestead exemption by $100,000, and you have $75,000 in credit card debt. Filing Chapter 7 is not an option because the bankruptcy trustee would sell your house and use the excess equity to pay your creditors and administrative expenses. If you file Chapter 13, your plan must provide for payment of credit card debt in full over a maximum of 5 years. That’s fine when you have the income to make it work, but what if only earn enough money to pay your mortgage and other necessary living expenses? In that situation, selling your house to pay the debt may be the best option.
Debt Settlement
Debt settlement is often confused with debt consolidation and vice versa. Debt settlement means negotiating with your creditors and reaching an agreement to pay less than the amount owed as full satisfaction of the debt. It is a viable option for you only if you have the money to pay the agreed upon settlement amount. Of course, you don’t know in advance of finalizing an agreement what that amount will be, but it’s likely to be in the range of 40 to 50 percent of the outstanding balance of each debt. For example, if you owe $60,000 in credit card debt, you should have the financial resources to pay $30,000. There aren’t any guarantees as to how much the debt will be reduced, but it is usually possible to settle most credit card debt.
Assuming you have the money to settle your debts, the procedure starts by making an offer to each of your creditors. As with any negotiation, the other party can either accept your offer or make a counteroffer. If there’s a counteroffer then you can counter back, and so on. Once you reach an agreement, money is exchanged for a release of the debt. Be aware that creditors will issue a Tax Form 1099-C for the portion of the debt that is being canceled/forgiven. For example, if you settle a $3,000 debt for $1,500, the amount of the canceled debt is $1,500. The canceled debt is generally reported as taxable income, but there are ways to avoid taxation, such as by demonstrating that you were insolvent on the date of cancellation.
I am experienced in debt settlement and will serve as your agent in negotiating settlements with your creditors. Due to the amount of time involved, the attorney fees are typically a bit higher than the cost of a Chapter 7 bankruptcy. Debts can be settled with original creditors or debt buyers, and settlement agreements are often negotiated through debt collection agencies. But you must be delinquent on payments to settle, as creditors won’t bargain with you when your account is current. Using a debt settlement company to help you settle your debts is not recommended, not only because of the fees they charge, but also due to the false sense of security. They have you set aside money on a regular basis until there’s enough accumulated to settle a particular debt, and then they finalize a settlement. The problem is that this process can take years, especially when you have multiple debts. In the meantime, the creditors waiting in the wings may decide to exercise their right to sue and get a judgment. If you can’t afford to pay or settle with a creditor who sued you, then you end up in bankruptcy anyway, having wasted money on a debt settlement program. The bottom line is that if you aren’t able to get your hands on enough money to pay about 50 percent of your debt within a very short time frame, debt settlement just isn’t a good option for you.
Debt Consolidation
Debt consolidation differs from debt settlement in that you aren’t asking creditors to cancel or forgive a portion of the debt. It can take different forms, but basically comes down to two separate paths:
1. Taking out new credit with better terms, such as a lower interest rate, to pay off the debt you’re struggling with now. This could be in the form of new credit cards with zero interest for balance transfers, an unsecured personal loan, or a home equity loan or line of credit. But if your credit score is below 700, you’ll probably have difficulty qualifying for unsecured credit, especially zero interest balance transfer credit cards. A home equity loan or line of credit is secured by a mortgage on your house, and you could lose your house to foreclosure if you aren’t able to keep up on the payments.
2. Participating in a debt management program. A debt management program is not a new loan. Debt management companies, such as Money Management International, work with your creditors to reduce monthly payments and interest rates on your debts. The payment schedule is typically 3 to 5 years, similar to a Chapter 13 bankruptcy plan. Your monthly payments are deposited with the debt management company, who distributes funds to your creditors per the payment schedule. The credit counselors at the debt management company will review your income and expenses to evaluate your ability to afford the payments. One of the biggest complaints I hear about these programs is the damage to a person’s credit. Given that you are not paying the debt per the original terms of your agreement with the creditor, you are in default despite making payments to a debt management program. Negative information sits on your credit report for seven years and drags down your credit score. Conversely, bankruptcy hits the reset button on your credit and enables you to recover from delinquent debt much more quickly.