You might not expect a bankruptcy attorney to tell you that bankruptcy isn’t your best option, but that’s exactly what the point of this post is. When someone comes in for an initial consultation, I know they’re looking for guidance and honest answers. I believe that bankruptcy should only be used as a last resort. Bankruptcy will stay on your credit report for ten years and may affect your ability to get a new job. It’s one of the biggest decisions that a person can face. I believe my job as an attorney is to make sure my clients understand all the alternatives available to them. If you’re thinking about bankruptcy, you should know you might have some other choices. They are:
Debt consolidation – This alternative involves combining your debt into a single line of credit. You might be able to consolidate your credit cards into one card, for example. If you can find a card with a lower interest rate, you’ll save money and get some psychological relief by having to only pay one credit card bill a month. This option requires diligence, though, because you want to avoid using the new credit card while you pay it down. If you’re using credit cards to pay monthly living expenses, like food and gas, and only paying down what you charged that month, you might not make the headway on reducing your debt you hoped you would. Another common option is to take out a home equity line of credit and pay off your credit cards. Remember that if you choose this option, you’ve just effectively used your home as collateral for the charges on your credit cards. If you default, your lender could foreclose on your home.
Debt settlement – Debt settlement involves either you or someone else negotiating with your creditors to reduce the amount you owe or restructure your repayment terms. There are two things you should know about this option. The first is that if you get a lender or credit card company to agree to reduce the amount you owe, there will likely be tax consequences. For example, if you currently owe $10,000 on a Visa card and Visa agrees to settle your account for $5,000 (usually in a lump sum payment), at the end of the year they’re going to send you a tax document that shows that you “earned” $5,000 in “forgiven debt.” That means you’ll have to claim that $5,000 on your tax return and potentially pay taxes on it.
The second thing to know about debt settlement, particularly when working with a debt settlement company, is how their system works. You’ll no longer be paying your creditors. Instead, you’ll be sending that money to the debt settlement company. But that doesn’t mean they’ll be sending it to your creditors. No, they’ll hold onto it (minus their fees) until they have enough to negotiate with your creditors. What that means is that your creditors will shortly start its collection process (if it hasn’t started already), which means that phone calls will start and you’ll likely have someone deliver a summons for a lawsuit. Debt settlement only prevents collection if you can immediately start and continue making regular payments. If not, your creditors are going to do whatever they need to do to collect what you owe.
Do nothing – This option always surprises people. Keep in mind that there are very limited circumstances in which you should consider this option. When a creditor gets a judgment against you, they can do a few things. They can garnish your wages and bank account and place a lien against your home if you own it. If you are retired or disabled and your only source of income is Social Security or money from a retirement or pension account, they can’t take any of that money. That doesn’t mean that they won’t sue you and that they won’t stop calling you. It just means that they won’t be able to take any money when they get judgment. All they’ll have is a piece of paper that say they can. If you own a home, they can place a lien against it, and you won’t be able to sell or refinance it until that lien is cleared, however.
If you’re wondering whether bankruptcy is your best option, consider scheduling a free, no-obligation consultation with a bankruptcy attorney. You can make your appointment online or call 303.331.3403.
