Debt Consolidation Stories

April 2, 2009

While searching the internet on “Bankruptcy v. Debt Reduction Programs”, I found a site called Debt Consolidation Care ww.debtconsolidationcare.com.  There were a number of interesting posts under http://tinyurl.com/ctt7b9.  In reading these stories I am reminded of my client who had already started with a Debt Reduction Program.  Some of the stories echo the issues or problems I mention in my post Bankruptcy v. Debt Reduction Programs http://tinyurl.com/cpxnra.

One of the post has a family who has started a reduction/consolidation plan, has paid money, had some success, yet was left to fight the court battles on their own.  They had not completed the program and were now wondering about bankruptcy.  The problem here is bankruptcy should have been considered more heavily before they agreed to a debt consolidation or reduction plan.  They have expended hard earned money for the opportunity to fight their own legal battles.  There definately is a stigma and much misunderstanding associated with bankruptcy, but I believe it is the best weapon or shield most people have for finding debt relief.

Other posts on the site mention how they have talked to an attorney and Chapter 7 will not work because their income is too great so Chapter 13 is their option.  They don’t like Chapter 13 because they are under the assumption that they will have to pay “all” their debts.  This is not true.  The goal of Chapter 13 is to bring secured creditors current while paying unsecured creditors a percentage.  Yes you may have to give up, liquidate, some of your luxury or excess property in order to help pay some of your creditors.  If you read any of Liz Pulliam Weston’s books, you will see that she promotes this concept.  She mentions many times that one alternative to finding cash to help pay down debt is to “have a garage sale”.  Sell some of the property that you do not need, even boats and additional autos.  We have to take control of our finances.  Either do it yourself if you are not too far in debt, or seek help.  Bankruptcy may be your best option because it will be handled through the court system, your collection actions will cease, you will know how much you need to expend, and you can quickly begin rebuilding your credit. 

Best of Luck.

Jeff Jackson, Bankruptcy Attorney, Central Ohio

I provide Debt Relief. I help people file for relief under the Bankruptcy Code.

Bankruptcy v. Debt Reduction Programs

In a previous post I noted that a Debt Reduction Program I had reviewed for a client appeared to not be an avenue in which many peopled in a credit crisis should follow.  I received some comments inquiring how bankruptcy would be better.  With that in mind, I will try and convey more detail as well as include information from Liz Pulliam Weston’s book titled “Deal with Your Debt”.

Specific requirements of the Debt Reduction Plan:

• Not continuing to make any payments to your creditors;
• Making an application payment and then continued monthly payments to the Program;
• If you miss a payment to the Program you are done, no excuses and no hardships;
• Letting the Program negotiate with your creditors.

Problems with the Debt Reduction Program:

• Your creditors are not required to cooperate with the Program to negotiate or settle your debt;
• The Program would not be working to negotiate with your creditors for three to four months;
• Your creditors are not receiving any payments;
• The plan could take two to three years, maybe longer;
• Your creditors will start collection actions and possibly file suit in the court system against you;
• The Program will not assist you in court, you need to hire an attorney;
• Your Credit Report and Credit Score will suffer considerably because of the collection actions and lawsuits;
• You are still making monthly payments to the Program;
• After a couple of years, depending on how effective the Program is, your debts may be completely settled, who knows;
• You do not get any refunds from the Program.

Bankruptcy, on the other hand, freezes all collection actions including lawsuits and foreclosures.  You do not make payments to creditors until your bankruptcy petition is approved by the court.  You will need to pay your attorney and filing fees, but these fees tend to be fixed in amount, and are probably much less than what you will pay to a Debt Reduction Program.

Issues to consider:

• In either a Chapter 7 or a Chapter 13 bankruptcy case, your creditors will be forced to negotiate or settle;
• In a Chapter 7 bankruptcy, you may need to liquidate some of your assets to help pay creditors;
• You are allowed many exemptions, within certain limits, for personal property, real property, cars, tools of the trade (need to check your state’s exemption requirements)
• In a Chapter 7 you may reaffirm your mortgage and auto loans;
• Your Chapter 7 case may be discharged as within four to six months from the date of filing your petition;
• In a Chapter 13 case, a repayment plan is prepared and approved by the court;
• The plan term is generally between three to five years;
• You are still allowed exemptions;
• Your secured debt (home and auto) is typically priority and the goal is to bring those current within the plan period;
• Your unsecured debt (consumer debt) is paid off during the plan, but generally at a reduced amount;
• Your payments are typically made to the bankruptcy trustee, who then distributes plan payments to the creditors;
• Your creditors communicate with the trustee and your attorney (no more collection calls).
• Flexibility, a Chapter 13 can generally be converted into a Chapter 7 in the event of hardships (loss of employment or income stream).

With all that said, which is better?  Why Bankruptcy? I prefer bankruptcy because it is certain and has some flexibility.  You know how much your attorney and filing fees will be.  You will know within a few months of filing your petition, how much you have to pay to your creditors and what your monthly payment will be.  You have the comfort of knowing that the collection actions and harassing phone calls will be suspended during your plan, with enforcement coming from your attorney and the Federal Court system.

Which will hurt your credit score most?  That depends and cannot be handled with a blanket statement.  Time is probably the most critical factor.  The Debt Reduction Program I reviewed indicated that it may take two to three years to complete the plan.  During this time your creditors who are not being paid will continue to report late payment history and collection activity on your credit report.  Obtaining new credit, to help repair your credit score may be very difficult.

With Chapter 7, your debts may be discharged in four to six months.  You can then begin rebuilding your credit score.  During a Chapter 13 plan, which runs from three to five years, your creditors are being paid and they are not reporting new collection activity.  With respect to your credit score, the following exerpt from “Deal with Your Debt” by Liz Pulliam Weston probably sums it up best,

“What people find is that bankruptcy isn’t the credit-killer it used to be.  Although the bankruptcy remains on their credit reports for up to 10 years, the growth of credit scoring and the sub prime lending industry means that those who have declared bankruptcy can get credit cards before their cases have ever been closed, auto loans within a few months, and reasonably-priced mortgages within two years.  Those who handle their finances correctly after bankruptcy find that they can restore their credit scores to near-prime status within four years of their filings.”

In other words, you can begin rebuilding your credit score within a short time after filing bankruptcy.  Under the debt reduction programs, you can work on improving your credit score, but you have no control over the existing debts which will hinder your improvements.  Also consider the fact that it may take two to three years after you sign on with the program for your debts to be settled, and there is no guarantee that they will be settled.  In my opinion, if you opt for a debt reduction program, you will lose precious time to rebuild your credit score.

See also http://tinyurl.com/czlyrz.  This post reinforces the above text.

Jeff Jackson, Bankruptcy Attorney, Central Ohio

Jones & Jackson, LLP

Delaware, Ohio

www.ohdebtcounsel.com

I provide Debt Relief. I help people file for relief under the Bankruptcy Code.