Law Office of Robert L. Firth
Your Options Instead of Bankruptcy
Can you solve your debt problems by settling, consolidating, or just not paying the debts? What are the advantages/disadvantages of each?
You deserve knowing all their options, including ones other than bankruptcy. Today we look at three of them.
1. Settling Your Debts
Debt settlement may be an option is the right circumstances.
If you don’t pay an ordinary debt timely, at some point the creditor sells the debt to a debt collector. Generally, the further the debt is in default the less likely it can get collected. That means the creditor will have to sell the debt at steeper and steeper discounts. And in turn that means that either the original creditor or the collector should be more willing to settle the debt with you for substantially less than you owe.
You will more likely be able to settle a debt at a deeper discount:
- as the debt gets older. That’s especially true as the debt approaches its statute of limitations, the legal deadline for collection.
- if you’re “judgment-proof. The creditor determines that you don’t have any assets or income that could be tapped for future garnishment or seizure.
- if the debt could be totally written off in bankruptcy, and there are signs you’re thinking about filing.
- when the debt is sold to a collection agency. This is especially true when a debt is sold a second or third time.
The advantage of settling your debts is to avoid filing bankruptcy.
Here are some disadvantages:
- You have to have available cash to make lump-sum offers to the creditors. If you have to borrow that cash from friends or relatives, you could just be digging yourself deeper into debt.
- Interest, late fees, and attorney fees and other costs can greatly increase the balance on a debt. So even if you settle a debt at a steep discount the amount you pay may still be high.
- Creditors’ written-off portions of debt may be considered “income” for tax purposes, resulting in you owing unexpected income taxes.
- Hiring a debt negotiation company to attempt this settlement work is usually not a wise use of your money. Instead get some unbiased advice from a reputable attorney about the feasibility of negotiating with your creditors. Attorneys have a legal and ethical obligation to serve you and only you.
2. Consolidating Your Debts
The benefit of consolidating your higher-interest unsecured debt into another loan with a lower interest rate and maybe a longer term of payments is that it might lower your monthly payment(s) just enough so that you can keep current. This may particularly make sense with specialized types of debt like student loans or higher-rate mortgages or vehicle loans.
But there are serious potential disadvantages:
- Avoid turning unsecured debts into a secured one, such as paying off credit card debt with a home equity line of credit. This changes debts that can be easily written off in bankruptcy into debts that likely can’t. This exposes your home or other collateral and limits your options.
- The truth is that paying down unsecured debts often leads to those sources of credit being run up again. Cash gets tight again, and you’re just left deeper in debt.
3. Not Paying Your Debts
If you are “judgment-proof” one option may be to simply not pay your debts. “Judgment-proof” does not mean that a creditor can’t sue and get a judgment against you. If you just don’t pay your debts you can and likely will be sued by a number of creditors. Instead the term means that your creditor cannot legally reach any of your income or assets to satisfy the judgment. That’s because your income is so low and your assets so modest that they fit within legal “exemptions.” Your income and assets are all protected from collection.
For some people, this can be a sensible short-term, and sometimes even long-term, tactic.
- Even if you really are “judgment-proof,” as mentioned very likely some creditors will still sue you. They are counting on getting the money out of you at some point. So you have to deal with the lawsuits and the anxiety they cause. You have to find out whether you may be exposed in any way. You need to be prepared to be sued and know how to react each time it happens.
- Being “judgment-proof” at one point does not mean that you will be forever. Your circumstances could change. The relevant laws could change, leaving you at risk. Hiring an attorney each time to determine if any of your income or assets was in jeopardy could get expensive.
Here are two things to keep in mind as you weigh these three alternatives to bankruptcy.
First, again, when you get advice from lawyer, that person has a legal and ethical duty to you alone. He or she will advise you but not tell you what to do. In presenting your options and their advantages and disadvantages, he or she can and sometime will make strong recommendations. Your lawyer will help you chart the best course of action based on your goals. But your lawyer will not “make you” file bankruptcy or choose any particular Chapter of bankruptcy. You meet with an attorney so that you can make a well-informed decision, to do whatever’s the best for you.
In contrast, people who work for a debt consolidation or debt settlement business are often paid to sell you whatever service they are offering.
Second, common sense says that you ought to get information and advice about your alternatives sooner rather than later. Otherwise it could cost you in countless ways. Your choices could be more limited. They could be more expensive. You could have wasted a lot of money before you made the right choice. And sometimes delay means not being able to fulfill your goals as well as you otherwise could.
The sooner you get good advice, the more it can help you.