Bankruptcy vs. Debt Consolidation/Settlement

The late night commercials and online ads promoting debt consolidation and debt settlement sound like a great option when you are sinking ever deeper into credit card debt. The ads play on most people’s desire to pay back their debts. The reality is that these companies are rarely successful in doing much more than making a significant profit while placing their customer in a much worse position.

The promise is that they will negotiate with your creditors so that you will owe significantly less than you currently owe and, so long as you make your monthly payment to their office, your life will become much easier. It is rare for someone to successfully complete one of these programs. In the meantime, their credit has been destroyed, they have spent thousands of dollars and, potentially, have been sued by one or more of their creditors who are now seeking garnishment of their wages.

How does Debt Consolidation/Settlement Work?

Once you contact one of these companies and sign up following their sales pitch, they will have you set up an automatic withdrawal from your bank account to them. This may be a monthly payment, bi-weekly or sometimes weekly. The promise is that they will stockpile these funds and then use them to negotiate reduced fee settlements with your creditors. However, the creditor that gets paid first from these funds is the debt settlement company. Often their fee is at least 15% of your total debt. If you owe $50,000 in credit card debts, the settlement company is going to pay themself a minimum of $7,500 before they start building the war chest of funds that they promise will be used to negotiate with your creditors.

Once you agree to start an automatic withdrawal from your bank account, it can be very difficult to cancel. Often you will need to close your bank account and open a new one.

During the months/years that your payments are going to the debt consolidation company, your creditors are not receiving any payments. This means that every creditor will be reporting negatively on your credit monthly. Eventually the creditors will get tired of waiting and will have their attorneys file a lawsuit against you.

I have seen many people summoned to a court docket by one of their creditors. They inform the judge that they don’t understand because they have been making regular payments. Since those payments to the debt consolidation company have not been going to the creditors – they do not count. As minimum monthly payments had not been received by the creditor, the judge must enter an order against the consumer.

After spending a significant amount of money with the debt consolidation company, you now have a judgment against you and are at risk of having your wages and bank accounts garnished as well as a lien being placed on your home.

Exploring Bankruptcy

Bankruptcy is a legal process that allows consumers to discharge or restructure their debts under the protection of the federal court. The filing will be reported on your credit report and remain there for ten years. It will not, however, repeatedly negatively post like your creditors will do on a monthly basis if you choose to try a debt consolidation company.

Chapter 7 Bankruptcy

When most people think of bankruptcy, they are thinking of Chapter 7 bankruptcy. It is a fairly quick process once filed as the case is completed in approximately 4 months. The debtor prepares and files a bankruptcy petition that lists all their assets, debts, income, expenses and other financial information. Once the bankruptcy is filed, creditors are forbidden from having any communication with the debtor.

There is one meeting with a Trustee who will have reviewed the bankruptcy petition and ask them questions about it. The Trustee is looking to see if the debtor has any assets that cannot be exempted (protected) that can be sold for the benefit of creditors. This rarely happens.

Once the case is complete and the Discharge Order is signed by the judge, the debts are gone forever. Those creditors can never contact the debtor again about those debts.

Chapter 13 Bankruptcy

Alternatively, Chapter 13 bankruptcy allows individuals to reorganize their debts into a manageable repayment plan that, typically, lasts three to five years. The debtor is under the protection of the bankruptcy court throughout this process.

Why would someone file Chapter 13 bankruptcy instead of Chapter 7:

1. They do not qualify for Chapter 7 based on income;
2. They risk losing assets in a Chapter 7 that would be protected in Chapter 13;
3. They have debts that are not dischargeable in a Chapter 7 but would be in Chapter 13 such as certain monetary awards from a divorce action;
4. They have mortgage and/or IRS arrears that need to be paid – Chapter 13 will give them up to five years to pay the arrears back without risk of losing the home in the meantime;
5. They wish to try to pay their creditors at least a portion of what is owed.

What is the Right Choice for You?

That will come down to several factors that will need to be discussed with an experienced bankruptcy attorney. The right attorney will listen to your concerns, ask quality questions and be able to quickly advise you as to what your options are and why one option may be better than another for your specific situation.

If you believe that you may need to consider filing for bankruptcy, please contact Navigate Law Group to schedule a consultation. By the end of the consultation, you will have had your questions answered and been given advice for your next step.