Bentzlaw's Blog


Bankruptcy Vs. Debt Settlement
September 7, 2010, 8:56 am
Filed under: Chapter 13, Chapter 7, General Debt Relief Articles

Debt Settlement V.S. Bankruptcy  

You don’t need to read the Newspaper or listen to the local news to know consumers are facing some of the worst financial challenges of their lives…just look around you. With rising medical costs, high unemployment rates and maturing interest only loans, many are unable to afford necessary expenses without the use of a credit card.  Add in the accruing credit card interest and you have a recipe for disaster in a shockingly short period of time.

At that point you may just ask, “Now What?” Rather than panic or create an unrealistic budget, start with the following suggestions:

  • Pull your credit report. Review it and make sure all items listed are accurate reflections of your current debt.  Determine your total liability.  Add any debts that are not listed on the credit report and are still due and owing as well as any judgments, tax debt, and child support arrears.

 

  • See where you are in order to formulate a plan: For your general unsecured debts like credit cards, medical bills, payday loans, and most delinquent payments with collection companies, plug in your average interest rate & principal over a period of 60 months (5 years) in an online amortization calculator (I suggest the following calculator:  http://www.bretwhissel.net/amortization/amortize.html)  and see what your total balance with the interest really equals.  Now, take your average net income per month and subtract necessary monthly expenses (i.e. gas, rent, food, etc).  Do you have enough left over after paying your monthly expenses to pay the amount listed on your amortization calculator every month to pay your debt? If you do, are you willing to pay that much (see your amortization calculator total for how much you are paying total in interest over five years) toward JUST the interest? If you don’t have the funds to pay your debt after monthly expenses or cannot justify working to pay thousands of dollars in interest to a creditor, You can do one of two things:

 

  1. Take action with a serious debt strategy & research options now; or
  2. Ignore the bills that are piling up, keep living the exact same way you have been, and perhaps face the situation later because of a court summons, judgment, lien, garnishment, non-stop collection calls, or some other overwhelming circumstance.

 

If you chose number one above and wish to determine your best debt strategy then let me congratulate you. Getting to the point where you were able to review your credit, debt, income, and expenses is very difficult.  You should sleep better tonight knowing exactly where you stand and learning about what options may fit your goals. Rather than wait for a creditor to attach to your assets or garnish you wages, learn about the different financial strategies while you still have a choice.  Now, lets look at the main options for consumer debt relief:

  1. Debt Settlement:

a.)      The Good:

–          Debt Settlement companies can sometimes settle 50% or more off an account balance.  Just remember there is no guarantee a settlement company will be able to do that because terms change depending on each particular consumer and creditor.

b.)    The Bad:

–          Have the Settlement Amount Ready: To have a successful settlement, you will need to have the amount available, usually in the form of certified funds/money order for the creditor. When negotiating a settlement, do not expect a payment plan option to be available.

–          No guarantees: Some creditors may not negotiate at all, preferring to write off the loss and file against you in court.  Others may offer only a 5-10% reduction.

–          Owing More than one Creditor: If you owe several different creditors, it is challenging to negotiate with the different creditors and have a lump sum available for each.  If one creditor agrees to work with you, but another refuses, you may face the same threat of garnishments and collection companies that you did initially.  In addition, a creditor’s number one concern is getting as much as possible without concern as to what you believe you may need to maintain for other creditors.

–          Fraudulent Debt Consolidation Companies: Beware of Debt Consolidation Companies offering debt relief….Since the start of the recession, the Better Business Bureau has received more than 3,500 grievances in all 50 states. Many of these complaints are based on companies who charge high fees, do not actually begin settlement negotiations until the amount paid in full, and then do little to no settlement negotiations. 

–          Your Credit Score: Settlement is likely to have a negative impact on your credit score if you were late on payments. That is because any collection companies or delinquent payments prior to a settlement will be on your credit report.  These late payments lower your credit score by around fifty points or more, depending on the number of late or missed payments and the other listings on your credit report.  However, if you successfully negotiate a settlement you may be able to include terms to mitigate negative reporting by the creditor.

  1. Debt Consolidation:

a.)      The Good:

–          Debt consolidation can make your credit appear “better” because several accounts will appear to be paid off even though the debt consolidation is creating a new credit account so lenders consider the others as paid in full. BUT, note that closing your older accounts can have a negative impact on your overall credit score because they provide your longest credit history.  If closed, your overall available credit line will decrease while your debt remains the same. Consequently, you appear to be a high risk to creditors.  

b.)    The Bad:

–          When you hire a third party to consolidate your bills, you will have to pay their fees in return for the services rendered and be especially diligent when reviewing the terms of any consolidation agreement to make sure you aren’t replacing one debt with another and paying more over a longer period of time.   As Dave Ramsey, Author of Total Money Makeover States: “Debt consolidation seems appealing because there is a lower interest rate on some of the debt and a lower payment. However, in almost every case we review, we find that the lower payment exists not because the rate is actually lower but because the term is extended. If you stay in debt longer, you get a lower payment, but if you stay in debt longer, you pay the lender more, which is why they are in the debt consolidation business.” (see: http://www.daveramsey.com/article/the-truth-about-debt-consolidation)

  1. Bankruptcy, Chapter 7:

a.)     The Good:

–          You force your applicable general unsecured creditors (credit cards, medical bills, etc) to release you from all liability pertaining to your debt and you are protected from creditor harassment, collection attempts, garnishment, judgments and so on as of the time you file your Chapter 7.

–          Usually costs significantly less to file a Chapter 7 bankruptcy than to pay a third party to consolidate or settle/negotiate your debts or file a Chapter 13 bankruptcy.

–          Has a higher success rate of discharging (getting rid of) a majority of your debt than debt consolidation or debt negotiation.

–          You are provided with certain “exemptions” so you can keep and protect your retirement savings, cars, household furniture, clothing, and so on to the exemption amount in the bankruptcy.

b.)    The Bad:

–          The Chapter 7 is on your credit report and does negatively affect your score even though it can be improved quickly.  Please see my article on how to improve your credit score after filing and The Wall Street Journal, Smart Money article, “Declaring Bankruptcy Can Improve Your Credit Score” by  Aleksandra Todorova for more information. (Article link: http://www.smartmoney.com/personal-finance/debt/declaring-bankruptcy-can-improve-your-credit-score-20681.

  1. Bankruptcy, Chapter 13:

a.)     The Good:

–          You force a partial repayment plan on your creditors that considers your specific income and reasonable expenses.  In the repayment plan, most consumers pay from ten cents on the dollar back your general unsecured debt (i.e. credit cards, medical bills, most taxes filed over 3 years prior to the bankruptcy, payday loans etc) depending on your income, expenses, and assets.

–          You are provided with certain “exemptions” so you can keep and protect your retirement savings, cars, household furniture, clothing, and so on to the exemption amount in the bankruptcy.

–          If you are behind on a house or car that you want to keep, you can protect it from repossession or foreclosure by putting the delinquent payments in your Chapter 13 repayment plan.

–          Simple Monthly Payment: For items you include in the bankruptcy repayment plan, you make one single payment to a “trustee” who then is responsible for distributing the funds to your creditors.

–          Lower Interest Rate: You can force certain secured creditors (like auto lenders and furniture loans) to lower your interest rate substantially.

–          After filing, you are protected from garnishments, judgments, and creditor harassment. 

b.)    The Bad:

–           The Bankruptcy will be on your credit report, but after filing your score can be improved quickly.  Please see my article on how to improve your credit score after filing and The Wall Street Journal, Smart Money article, “Declaring Bankruptcy Can Improve Your Credit Score” by  Aleksandra Todorova for more information. (Article link: http://www.smartmoney.com/personal-finance/debt/declaring-bankruptcy-can-improve-your-credit-score-20681.

–          Because it is a complex process, you should hire a lawyer to assist you in filing a Chapter 13.  If you hire a lawyer, you will have to pay them for the services they provide you in return.  However, your most lawyers allow you to pay part of your attorney fees prior to the filing of the bankruptcy, and the remaining balance can be included in the Chapter 13 repayment plan so most people do not need to have the full lump sum to file the case.

Advertisements

Leave a Comment so far
Leave a comment



Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s



%d bloggers like this: