What Are Your Options?

Bankruptcy Might be Right For You, But What are Your Other Options?

When faced with the unpleasant situation of not being able to pay your bills there are only a few options other than bankruptcy. First, understand that bankruptcy is generally not the best choice if your financial difficulties are only short-term situations. If you expect to recover and be able to pay your debts, follow the instructions below and call your creditors.

Each option described below has risks and challenges that you need to understand before deciding to use it. All of the options below take a long time to complete and none of them are guaranteed to resolve your debt. Make sure to read the descriptions carefully and call us if you have any questions.

The options are:


Call Your Creditors

When you can't pay your monthly bills, the first thing to do is to call each creditor and explain to them that you can't make your monthly payment and ask for a 1-month extension. Most creditors will grant this as long as you have been a good customer and have made previous payments on time. This may give you the breathing room to get caught up from an unusual expense or other short-term problem.

If you need more than a 1-month extension, ask your lender for a reduced monthly payment schedule for 3 months to allow you to resolve your short-term financial setback. Again, most creditors will grant this request once you tell them that you can't make your monthly payment. Frequently, creditors will grant you a short-term (like 2-3 months) interest-only, or reduced payment, plan in order for you to remain current. Be aware though, your creditors will likely report the reduced payments and your credit score will be impacted. If you need more than 2-3 months help, then you need professional help.


Debt Consolidation Loans

Taking out a new loan to pay off your old debts is rarely a good idea, even if the interest rate on the new loan is a lot lower than what you were paying before. But, if you are considering one, make sure that you really can repay the loan. Make sure that you understand the interest rate charged, the length of the loan, any costs the lender imposes on the loan. Many debt consolidation loans charge up-front loan fees called "Points" or some other clever term and will have "Balloon Payments" at the end of the loan to keep your monthly payment low. But, you don't want such a loan because you don't know what your financial situation or the general economic situation will be when the balloon payment comes due. Make sure there is no "Balloon Payment" at the end of any debt consolidation loan you are considering.


Debt Settlement Companies

These companies promise to settle your debts for pennies on the dollar. All you have to do is make a monthly payment to the Debt Settlement Company instead of your creditors. As time goes on, you build up a balance in your account with them and once the balance reaches a certain amount, they will settle with the credit card company for pennies on the dollar. These companies charge a fee of 15% of your total debt, and they collect this money before any money goes to your creditors, along with a monthly servicing fee that they charge. The salesman will tell you that all credit card companies are happy to work with them to settle these debts and that the harassing phone calls will stop.

This is not true! All it takes is one credit card company suing you to collect the debt and you are right back to where you started! Once the lawsuits start, you are generally better off filing bankruptcy so that all of your debts are addressed. No matter what, at the end of your successful bankruptcy case, all debts that are dischargeable will be gone forever. If you have debts that are not dischargeable, you can file Chapter 13 and have 5 years to pay the debt without interference by the creditor.

What About Your Other Debts Such as Taxes, Student Loans, Etc.? What if you owe debts that are not dischargeable in bankruptcy, such as student loans, certain taxes, or family support obligations ordered by the court? These debts cannot be discharged in bankruptcy and won't go away unless they are paid in full. The debt settlement company almost always will leave these debts out of the program because they can't settle these debts for less. In effect, they are ignoring debts that won't go away while funneling your hard-earned cash to debts that could be discharged in bankruptcy. Wouldn't it be better for you to put your precious cash toward debts that aren't going away before paying debts that you could discharge in bankruptcy?

There are substantial risks to using a Debt Settlement Company. While waiting for the company to settle your debts, you can be sued before the company can settle with a creditor. This happens frequently because either the credit card company doesn't want to wait to get 35% of what is owed, or they sell the debt to a collection agency who is definitely not going to wait. The salesman will tell you, if you ask, that they can't do anything for you when you are sued. If you are sued, you are generally in a worse situation than you were before you started this whole process. Do you really want to take this risk?


Debt Counseling Companies

Going to a debt counseling company works for some people. These companies are generally able to arrange lower interest rates and a fixed payment schedule for credit card debts. However, there are serious risks when using such companies.

Creditors may be paid late, or not paid at all. Many people find out too late that their counselor was paying their debts late, or not paying the debts at all. Late payments will cost you money in late fees, in addition to doing continual damage to your credit score. If you decide to use a credit counselor who is making payments from the money you pay the counselor, make sure the bills and statements come to you so you can verify payments are being made, and on time.

Using a Counselor may damage your credit. The effect on your credit depends on your creditors. Currently, some banks are taking the position that since you are dealing with your problem, they will still continue to do business with you. Many other banks consider using a credit counselor the same way that they view someone in Chapter 13 bankruptcy. They see you as a borrower who couldn't make the payments without outside assistance.

Using a Counselor may just delay the inevitable. Some counselors will try to put people that really should be in bankruptcy into a credit counseling repayment plan. These people work and struggle for years to pay the payments on the plan, only to file bankruptcy. Many people, for one reason or another, are unable to complete the credit counseling plan. When that happens, bankruptcy is the only solution. However, they have suffered needlessly for years trying to make the plan payments.


Bankruptcy

Bankruptcy, while appearing to be the least desirable option due to its reputation, is frequently the best option for people in serious debt because it provides a known point at which the person knows that the debts will be resolved, and resolved in a way that fits their budget. For example, Chapter 7 will eliminate most debts while allowing the person to keep their cars and homes as long as these payments are current, or can be made current by negotiating with the lender. Chapter 13 will also eliminate most debts, however, it has certain advantages over Chapter 7. Chapter 13 gives the person up to 5 years to repay debts on property that the person wants to keep that are severely delinquent, such as a home or car. Chapter 13 will also give the person up to 5 years to pay off debts that are not dischargeable, such as certain taxes and support obligations.

If You Have More Questions


Please contact us if you have more questions or are ready to move forward and start the process of becoming debt-free. Remember, we are here to help you resolve your debt problems, so call us now!

(949) 954-7568