Bankruptcy. While we know it is not a bad word, you may not realize that yet and are looking for alternatives. Isn’t there something else you can do? Sometimes yes, sometimes no. But, the key is making sure you understand the different options and use common sense in exploring and addressing those options.
We know having to address this situation makes your stomach hurt and your hands sweaty. But, talking to someone local who understands all aspects of the troubles you face and can give you specific advice is really important. You need to consider all your legal alternatives available so that you can decide which will benefit you the best. We have included information below about why we think bankruptcy is usually a better solution than debt management or settlement. Please take the time to review this and then read about Chapter 7 and Chapter 13 bankruptcies under the links to those pages. (Links are under Bankruptcy info heading above.) Then, come see us and review your personal situation for the best remedy.
Debt management companies seek to reduce interest and restructure your payments to creditors over three to five years paying back 100% of your debts. What you pay is based on the amount of debt – not on your ability to pay. For some folks, these companies work fine. But if the debt management payment makes you unable to provide for the necessities of life, then you need to re-evaluate your plan and look at bankruptcy. A debt management plan is normally as damaging on your credit as bankruptcy as most lenders will continue to report you as late on payments, which continues to harm you until the debt is paid off.
If you look at using a debt management company instead of bankruptcy, it is very important to understand the differences and use a local non-profit debt management company. Be careful: there are many dishonest debt management companies that charge high fees and provide little value. Don’t send your hard-earned money to someone in another state or county with the idea they will pay your creditors. You need someone you can sit down with and evaluate your income, your expenses, and that is accountable for the funds you pay into the plan. I often suggest some clients visit Consumer Credit Counseling in Roanoke before deciding to file bankruptcy, so they fully understand their different options if I think credit counseling is an option.
You can also visit the Federal Trade Commission’s website, on coping with debt, to see their warnings about debt settlement and management companies and how to evaluate them: http://www.consumer.ftc.gov/articles/0150-coping-debt#use
We will admit we are biased against debt settlement companies. We’ve just seen too many good people lose thousands of dollars to these companies. But, you need to know what they are and how they work.
A debt settlement company’s goal is to collect funds from you every month until it has saved enough to settle for pennies on the dollar with your creditors. If you only have one or two creditors, this may work fine (although in our opinion, you can do that yourself without paying an outside company). The problem with the vast majority of these companies is that they simply don’t work in the long run. They are negotiating with the creditors and asking creditors to not take collection activity on their promise that one day they will collect enough funds to pay a portion of the debt.
But this is all voluntary and there is no force of law behind it. If one creditor — just one – declines to participate, the whole program goes down the drain. And it usually takes all the money you have paid with it. We see this all of the time. Folks have paid thousands of dollars to these companies, and then they get hit with a lawsuit or garnishment from one creditor who did not agree to participate. All of a sudden, they cannot afford the payment anymore and have to see us anyway.
Most folks think that debt settlement is better than bankruptcy on their credit report. But, debt settlement shows negatively on your credit report, can remain on it for up to 7 years, and there are tax consequences. Bankruptcy is on your credit report for 7 to 10 years, but (and this is the important part) you start rebuilding right away no matter if you are in a Chapter 7 or 13. With debt settlement, it usually takes years to settle the various debts, delaying the rebuilding process.
Chapter 7 is often referred to as a straight bankruptcy, as it is short in duration and discharges, or wipes out, most unsecured secured debts such as credit cards, medical bills, personal loans, and other types of debts with no collateral or security attached. (See below for examples of unsecured debts.)
If you have secured debts where you would like to keep the collateral, such as a house or car, you must continue to make those regular contractual payments. Normally you can keep that property in a Chapter 7 if you are up-to-date on the payments.
Assets: First we look at whether we can protect your assets– items that you already own or have an interest in– underneath a Chapter 7. Underneath Virginia laws you are only allowed to keep assets valued at a certain amount if you file a Chapter 7. In some cases if assets are greater than the allowable exemptions the court will take those assets and sell them to pay back your creditors. Most folks don’t want that to happen. We can evaluate your case to determine can we protect the things you own and that are dear to you.
Income: The second area we review is income. Chapter 7 is reserved for folks who have no ability to pay back anything on their unsecured debts. In reviewing income we consider many factors: past income, future income, and what your regular future monthly expenses will be after bankruptcy. These factors determine who can successfully file a Chapter 7 based on their income.
A Chapter 7 bankruptcy stays on your credit record for 10 years from the date you file. However, most folks find they can successfully rebuild their credit after only about 2 to 3 years.
Some debts are not dischargeable in a Chapter 7. In particular, student loans cannot be wiped out in a Chapter 7 and most taxes cannot be discharged. If you owe debts to a ex-spouse from a divorce, whether support or payments due under a separation agreement, these debts are normally not dischargeable in a Chapter 7. The law also prohibits discharge of certain other debts based on fraud and other factors.
Unsecured Debt Examples:
• Credit Cards
• Medical Bills
• Personal Loans
• Deficiency claims following a repossession or foreclosure
• Old Utility Bills
• Most Older Collection Accounts
Secured Debts Examples:
• Mortgages or Equity Lines on Your Home
• Car Payments
• Furniture Payments
• Rent-to-Own Payments
• Jewelry Payments
Chapter 13 is often called a wage-earner plan. It is a repayment type of bankruptcy where you pay back a portion, or sometimes all, of your debts over a time period of 3 to 5 years.
Chapter 13 allows you to make one consolidated payment to the Court, which then pays almost all of your creditors. Usually, you may still pay your future mortgage payments directly, but car payments, furniture payments, tax payments and other debts can all be consolidated into the one Chapter 13 payment.
Important: Most Chapter 13 debtors only pay back pennies on the dollar to their unsecured creditors, which makes Chapter 13 MUCH more affordable than most debt settlement or debt consolidation plans.
The benefits of a Chapter 13 allow a debtor to:
• Catch up past-due mortgage payments and stop foreclosures
• Catch up or restructure automobile or furniture payments and avoid repossession
• Restructure debts owed in divorce settlements (other than child or spousal support)
• Stop tax levies
• Stop garnishments
• Control student loan payments when there are no other alternatives
• Freeze your debts: No more interest, no late fees, no lawyer fees
• Tell your creditors how much YOU can afford to pay, rather than having them tell you what you must pay.
As your attorneys, we determine how much you are required to pay back and how much you are able to pay back taking into account the following facts:
Assets: The value of your assets (things you own) is one factor in determining how much you may have to pay back in a Chapter 13 bankruptcy. Many folks who would lose a home in a Chapter 7 because of their equity are able to file a Chapter 13 and pay back a reduced amount of debt, but get to keep their home.
Ability: Your ability to pay also determines how much you have to pay back. Simply put, the more you make, the more you may have to pay back.
Types of Debt: Different types of debts require different treatment in a Chapter 13. For example, taxes owed to the IRS and incurred in the last three years must be paid back 100%. But Chapter 13 can stop all future penalties and all future interest on those taxes. Older taxes often can be discharged and paid back at cents on the dollar.
A Chapter 13 bankruptcy stays on your credit record for only 7 years from the date you file. However, many of our clients find their credit scores start rising within the first 12 months of their repayment plan as their debts are now being timely paid and balances are decreasing.
Most debts are dischargeable in a Chapter 13, except for most student loans or certain support obligations.
The law also prohibits discharge of certain other debts based on fraud and other factors.