Options for Getting Out of Debt
Chapter 7 Bankruptcy
Chapter 7 Bankruptcy Through an Attorney: Chapter 7 bankruptcy is the most powerful weapon a debtor has to get out of debt. You are allowed to eliminate most credit card, medical, and other consumer or business unsecured debt. That is why you can only file chapter 7 bankruptcy once every eight years. It is your most powerful anti-debt remedy, so you must use it wisely. There is no payment plan in chapter 7 bankruptcy, unless the trustee is liquidating some of your assets and allows you to buy back your non-exempt assets in a payment plan. Contrary to popular belief, most debtors do not lose their home or motor vehicles, as well as all other property in chapter 7 bankruptcy. The most common assets that you may lose in bankruptcy is your next tax refund received after filing bankruptcy, 25% of your first paycheck received after filing bankruptcy, and 25% of funds remaining in your bank accounts at the time of filing bankruptcy. Careful bankruptcy planning can avoid the loss of any assets.
Chapter 7 Bankruptcy Through a Debt Relief Agency (Bankruptcy Petition Preparer): There are many businesses that advertise chapter 7 bankruptcy from $200 to $500. That is a lot of money considering you act as your own attorney when you hire a typing service. When things go wrong it is difficult to fix the problems . You get what you pay for with these agencies. I have sued several of these companies over the years and have put two of the worst out of business. They can do a lot of damage. If you have a problem with a BPP give me a call. On May 15, 2012, a Colorado bankruptcy judge ruled that it is unreasonable for a BPP to charge more than $200 total for a chapter 7. The court said that the BPP should have charged no more than $150 in that case and ordered the BPP to give up her $499 fee. The court also awarded the BPP's client $2,000 and fined the BPP $2,000 for violations committed by the document preparer. If you have a simple no-asset chapter 7 case, you may qualify for my lowest price of $599. Please refer to the Legal Assistance video.
Do-It-Yourself Chapter 7 Bankruptcy: There is an organization called Nolo Publishing that publishes a book called "How to File for Chapter 7 Bankruptcy". It is the best of the do-it-yourself bankruptcy publications, and it may be an option if you have an easy bankruptcy.
In the end, all debt relief options hurt your credit, but only chapter 7 bankruptcy allows you to immediately start rebuilding your credit the day after you file your bankruptcy.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is the second bankruptcy option. The problem with chapter 13 bankruptcy is that nationally only one out of three debtors successfully complete the chapter 13 bankruptcy plan. It has a 66% failure rate. This is due to chapter 13 bankruptcy forcing the debtors into a budget based on IRS guidelines that are used for collecting delinquent taxes. For example, you are allowed to spend $315 per month, or $10 per day, for food. Only the most frugal of us can survive on $10 per day for food. Chapter 13 bankruptcy is often referred to as the modern day equivalent of debtor's prison. However, chapter 13 bankruptcy is often the only way to stop a foreclosure of your home, especially if your home modification options have expired. If you have high income it may be your only bankruptcy option, since you will not qualify for chapter 7 bankruptcy. Furthermore, chapter 13 bankruptcy hurts your credit rating and it is difficult, if not impossible, to rebuild your credit while in a chapter 13 bankruptcy plan. It normally delays rebuilding your credit for the three to five year duration of your bankruptcy plan.
Credit Counseling & Debt Management
These are nonprofit companies that consolidate your debt (usually only credit card debts) and arrange a three to seven year payment plan, which pays back the full principal of your debt with an approximate 8-10% interest rate. Prior to 2005, these credit counseling plans actually worked fairly well since the payment plan included zero interest and penalties. Consumer Credit Counseling of Greater Denver and Consumer Credit Counseling of Northern Colorado were the two original companies in Colorado. Unfortunately, both of these businesses failed, and were bought out by Money Management International and Greenpath Debt Solutions. The reason they failed was that most of the creditors working with consumer credit organizations raised their interest rates from zero to approximately 10% back in 2005. Debtors who are current on their credit obligations are often already paying 8-10% interest, so these plans are of no benefit to them. Debtors who are in default of their obligation and paying default interest rates up to 29% are the only ones who may benefit. As with all debt relief options, debt consolidation hurts your credit rating. Click here to find out what the difference between credit counseling and debt settlement is.
Debt Settlement & Tax Settlement
The debt and tax settlement business is probably one the most fraudulent in the United States. Every day I speak to clients who have already gone through debt settlement and have ended up in far worse shape than they were in prior to debt settlement. Therefore, they also end up filing bankruptcy. The major problem with the debt settlement industry is the way they structure their programs. Most programs are set up for the debt settlement business to get paid in advance (usually 15% of total debts to be settled) before they settle even one debt. Creditors won't even consider debt settlement until the debt is at least six months in default. Usually the first six payments you make to the debt settlement business is applied to your debt settlement fees. The problem is that when you are about six months in default of your debts, the creditor may sue you and there are no funds available for settlement because the debt settlement company applied your funds to their fees. The average settlement through a debt settlement agency is approximately 50%. Click here to see the Government Accountability Office Report, and for more information on whether to use a debt settlement service click here.
Debt settlement hurts your credit rating while in process as well as if successful. After a settlement, your credit report will state "Settled for less than full amount." This is a negative remark which will severely impact your credit score.
Debt settlement often leads to adverse tax consequences. For example, I tell my clients who attempt debt settlement through my office that if they settle a $10,000 debt for $2,500, or 25% (which is my average settlement amount), they will pay taxes on the $7,500 of debt forgiven (the creditor will normally send a 1099). If they are in the 20% tax bracket that means they will pay the IRS an additional $1,500 in taxes, resulting in a net settlement of 40%.