Dealing with Personal Debt without Filing for Bankruptcy
If you find yourself in a financial crunch, filing for bankruptcy may seem like the only way to escape your situation. If some cases, that may be true, but you should consider all your options. So don’t overlook the many other steps you may be able to take short of filing a Chapter 7 or 13 bankruptcy petition, which will stay on your record for 10 years and make it much more difficult for you to obtain credit in the future.
Bankruptcy alternatives include: putting your finances on a better managed, more sustainable basis; negotiating work-out plans with your creditors; using credit counseling or debt-relief services; or consolidating debts into a mortgage. None of these options are pain-free or automatic (caution is especially needed if you’re thinking of using a debt-relief service), but – depending on your financial situation and prospects, your management abilities, and the nature and amount of your debt load – one or more of those options may be a better way to get back on your feet.
Self-Help: Your initial step should be a realistic appraisal of where you stand, in terms of income, fixed and variable expenses, and the reasons and amount of debt you’re facing. Then re-check your budget (or make one, if you haven’t already done so), to find areas where you can generate additional income or make spending cutbacks.
Negotiate with Creditors: If you’re having trouble paying your bills, you might consider getting in touch with your largest creditors, to tell them of your situation and try to negotiate a payment plan giving you more time or waiving some fees. The time to try this is before the creditor has written off your account and turned it over to debt collectors, or started foreclosure or repossession. Those steps impose costs on creditors that a work-out lets them avoid, if they think you are leveling with them and, with a little breathing room, you can make good on your debts.
Debt Relief/Credit Counseling Services: Reputable consumer credit counselors can help you find ways to manage or reduce your debt, and such services may be available through such sources as local non-profit groups, colleges, credit unions, or military, housing or agricultural government agencies. Check carefully on their credentials before working with any credit counseling group, and be aware just because a group describes itself as non-profit doesn’t automatically make it trustworthy.
Debt-relief service firms can act as intermediaries in negotiating with creditors. Unfortunately, extravagant but undelivered promises and outright scams are not uncommon, and have drawn the attention of consumer protection agencies and state attorneys general (good sources for checking on complaints and enforcement actions).
Debt-relief services in some cases can negotiate payment or settlement plans creditors. They frequently recommend that clients join a debt management plan, which requires the debtor to make regular deposits over multiple years into an escrow-like account, which the firm uses to make payments if it’s able to negotiate a payment plans with creditors. Such plans can work, but many who enroll find themselves unable to keep up with payments, or creditors unwilling to deal.
Before considering participating in such as a plan, make sure you understand all details (including what may be heavy fees), get them in writing, and be very wary of any debt-relief service firm that doesn’t fully explain plan risks, wants upfront fees, or “guarantees” it will be able to reduce your debt or stop lawsuits or debt collection actions.
Debt Consolidation: A possible option for a hard-pressed debtor might be tapping home equity through a second mortgage or home-equity line. The advantage: a new source of funds to pay troublesome debts. The corresponding disadvantages: the added costs, and the risk late or missed payments on these consolidated debts could mean losing your home.
If you would like more information about this topic or have general legal questions, please feel free to contact me at (201) 904-2211 or via email at pl@pjlesq.com. We answer legal questions on a daily basis and would be happy to discuss any issues or questions that you have with you. © 2017, Law Offices of Peter J. Lamont & Associates. This Update is provided for informational purposes only. It is not intended as legal advice nor does it create an attorney/client relationship between the firm and any readers or recipients. Readers should consult counsel of their own choosing to discuss how these matters relate to their individual circumstances. This Update may be considered attorney advertising in some states. Furthermore, prior results do not guarantee a similar outcome.