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Non-Bankruptcy Solutions

When struggling with debt, consumers have options other than bankruptcy; however, beware, because the phrase "if it sounds too good to be true then run" can apply here. While these options are beneficial for some consumers, for most, choosing debt settlement or a debt management program could only prolong the struggles, and most often put you in a worse position. Let's looks at each option on its own, and the merits they may present.

Debt Settlement
(Directly with creditor)

This is where the consumer will offer the creditor a fraction of what is owed to settle the entire balance. For example if you owe $10,000 you could make an offer $6,000 to settle the debt in full. If the creditor accepts, then you pay them $6,000 and they write off $4,000. It sounds like an ideal situation, but you'll need to pay that $6,000 right then, and they'll want to transfer it out of your bank account that day or the next. At best, they will want it all within 60 days. Do you really have $6,000 just lying around? Further, you will receive a 1099 (a miscellaneous income statement) the next year as if this $4,000 was income to you, and you will be taxed on the $4,000 the creditor writes off. This will most likely translate into an additional 25% in taxes; maybe more, depending on your tax bracket. The creditor will not advise you about this at the time of settlement, as their interest lies in getting some of your money.

Most creditors will not negotiate a settlement unless it is with a collections company, which means it will only become a real option several months after you first become delinquent. By this time, your credit report has taken multiple hits. You have 30, 60, 90 days late reported, you might be over the limit due to late charges and interest, and it may now be appearing again on your credit report, but this time with a collection agency. Also keep in mind, if your debt was $3,000 with the creditor when you started to struggle and could not make the payment, and assuming the limit is $3,000 each month, this principle balance will increase due to interest and fees. So in a matter of a few months the $3,000 could become $3,400 and will continue to rise. So a year later when the debt is $4,500 and you settle for $2,500, is this really a good settlement? Was the $500 savings worth the continually destroyed credit over the twelve months of delinquency? In this scenario you would receive a 1099 for $2000, which could easily be a further $500 in taxes. Where is the savings here? Was it worth the wake-up calls and bed time calls you received from collectors every day?

What about Debt Settlement with third party companies? We recommend that you do not go with a debt settlement company that offers payment plans. You will put yourself in a worse off position, and a more highly stressful situation than you were in to begin with. All you want to do is make the debt go away, and you really don't want to file for bankruptcy, because you consider bankruptcy a bad word. The debt settlement companies prey on those emotions. They tell you not to worry, just pay them $500 a month and all will be well. When they have enough to settle with one of the creditors, they will, and often can, settle for 20% or 30% of what is owed. Let's examine these claims more closely. (1) Their fees are almost always paid first (I found most charge $3,000 and up, which is probably more than a Chapter 7 bankruptcy will cost ). Thus, for the first 6 months you are paying them, and not a penny of your debt. (2) While you are paying their fees, the creditors continue to call you, continue to charge interest and fees, continue to report negatively on your credit report, and can still sue you. (3) About a year into the program, assuming the debt settlement company has enough funds to settle one of your debts, you will have to pay taxes on the amount the creditor writes off. (4) If the creditor does not want to wait around for your debt settlement company to build up enough funds to settle with them, they can, and probably will, sue you. You will represent yourself, unless you pay more for them to represent you, and in all likelihood the creditor will get a judgment, and start garnishing your wages, levy your bank accounts, and attach liens to your property. Of course, at this point with all the interest, fees, and court costs added to the debt, they are coming after you for a lot more than the amount you originally owed. (5) The debt settlement company is probably a long way away from you; many are in Florida and Texas. It is simply not feasible for you to go and bang on the doors of these companies, and ask "What in the heck is going on? I've sent you $7000, and now I'm being sued. You're not helping me." When you try calling, the phone just rings.

One of the hardest consults we have is with a debtor in a debt settlement program who has paid thousands of dollars, timely and in the manner the program requested, and has settled only one account, with a judgment against them from another creditor, a creditor they thought the debt settlement company was "handling." Now, their only option is to file for bankruptcy or lose more, have their house liened, or worse.

To cut a long story short, unless you have 60% of the debt you owe, cash in hand, debt settlement is not a recommended option.

Debt Management Programs

This is a program where you work with a third party, most often a non-profit organization, to create a manageable program to pay your debts. This is most often a very good program if you look into it when you are just starting to struggle with your debts.

Here is how it works: you give the third party organization a list of all of your debts and a budget. Then, they look to see what programs your creditors offer. Most of the major creditors already have "debt management" policies in place. Some creditors will lower the interest rates; some will re-age your account once you have made your third payment in the program to stop the negative reporting. Some creditors will report you are in a debt management program and some will not, but they will all close your credit card.

Once the third party organization has figured out what each creditor will accept, they come back to you with a monthly dollar amount. If you can afford it then great, you make the monthly payments to them and they distribute it among the creditors. Most organizations charge a small monthly fees ($45 or so) but they are most often also compensated by the creditors as well.

The debt management programs are usually several years in length. One of the keys to success is to make all the payments and to not open more credit accounts while you're in the program. Of course, not having open credit prevents you from concurrently building your credit, but it will ensure you are more likely to complete the program.

Here is one more nugget of knowledge to consider: statistically 7 out of 10 people who enter the debt management program fall out before completing. I, Chad M. Johnson, President of Bankruptcy Law Group, was one of those 7. I was in a debt management program for nearly five years, with around $20,000 in debt when I started. After five years in the program, my debt had not gone down significantly, my credit was not beginning to be repaired, and I decided to wipe it out in a bankruptcy and get the fresh start I so desperately needed. In the 18 months after my bankruptcy, my credit improved more rapidly than it did in the entire 5 years I was in the debt management program and I began to sleep better at nights.

While at Bankruptcy Law Group, we specialize in bankruptcy, we will look at your situation with these other options in mind and we will answer your questions as to why or why not these non-bankruptcy options are good for you. The consultation is free, and I guarantee you will gain enough information to make an informed decision about your financial future. Schedule your free consultation here.

-Chad Johnson - President