If you're feeling overwhelmed by debt and aggressive debt collectors, you might be tempted to plunge straight into a bankruptcy filing. But you should never make that decision in haste, because filing for bankruptcy is a serious and sometimes life-changing move that comes with significant financial sacrifices. In addition, federal law requires people who file a bankruptcy to complete credit counseling before they can file. For people who think they can avoid filing for bankruptcy, or know they need another type of financial help, a debt relief program may be more appropriate. If you're not sure what's right for you, an experienced bankruptcy attorney can help you make that decision, and guide you toward debt relief alternatives that suit your individual circumstances.
For people with very low incomes and few assets, doing nothing really is a viable option. That's because people who don't have much that can legally be taken are considered "judgment-proof" -- it's not worth a creditor's time to go after them. Creditors can't take away public benefits like welfare and Social Security, or food and clothes and other essentials. And unless you willfully refuse to pay taxes or child support, you can't go to prison for being in debt. However, there's nothing to stop a creditor from taking things deemed nonessential, including part of your wages. And if you start making more money, you may no longer be judgment-proof.
If you have some income or property and just need help meeting your payments, you can work with many creditors to set up a new payment plan. Creditors want to get paid; if you can show them you want to pay but simply can't afford your current plan, they may work with you to find a better one. This works best for people with a manageable amount of debt from one or two creditors.
These agencies are a better option for people who need help understanding their rights, managing a whole lot of debt or dealing with unethical or unpleasant creditors. Credit counselors can help you negotiate with creditors to set up a debt management plan, which consolidates your debt into one manageable monthly payment. This does not have to be a loan! They should also educate you and your creditors about your right to be free of harassment, and teach you financial skills that will help you stay out of debt on the future.
A big upside to this option is that you won't have a bankruptcy on your credit record for the next decade. However, debt management programs also have serious downsides. For one thing, they don't carry all the protections of a bankruptcy; if you miss even one payment, creditors can come right back. Debt management programs also won't allow any of the debt to be erased, unlike a bankruptcy. And some debt consolidation loans can carry interest so high that it just adds to the problem.
People who choose this option should also make sure to use a legitimate credit counseling organization -- not one of the companies that exploit people who are already deep in debt. Never use any agency that makes unrealistic promises or demands payment up front. For a list of agencies approved by the federal government, visit the U.S. Trustee's Web site.
A new trend in debt management is debt settlement, in which a bankruptcy attorney negotiates on your behalf with creditors. Generally, it's best used with creditors who hold unsecured debt, which is debt not tied to any property the creditor can repossess -- credit card bills, medical bills, or anything being handled by a collection agency. An attorney negotiates with the creditor to reduce what you owe, and you make a lump-sum payment of the remaining debt.
The advantage of using a debt settlement attorney is clear: Rather than having to negotiate directly with creditors, or sort through many debt counseling agencies to find a legitimate one, you have an experienced negotiator do it for you. It also gets the debt out of your life quickly, allowing you to clear your record and move on. However, in order to use this method, you must be able to make that lump sum payment using some large financial asset such as the equity in your home. And if your debt is secured to your home or another large asset, this method may not work for you.
For people who can't manage their debt another way, or who have a home or other large asset to protect, filing for bankruptcy can be the best option. Bankruptcy is a court proceeding that can help you legally erase your debt. With the help of a lawyer, a judge and a court-appointed trustee, you determine how much of your debt you can afford to pay off and pay that; the rest is “forgiven,” or wiped off your record. You will still have a bankruptcy on your credit record for seven to ten years, but you'll emerge from bankruptcy with no debt at all.
There are two bankruptcy options available to most individuals and married couples. In one, Chapter 7 Bankrkuptcy, you liquidate (sell off) everything you can to pay off creditors. In the other, Chapter 13 Bankruptcy, you set up a three- to five-year repayment plan through the court. Anything you cannot pay off with these methods is forgiven. Which one you choose depends on your income, the types of debt you have and other circumstances. A skilled bankruptcy lawyer can help you decide which one is best for you. Call us today to find a bankruptcy attorney in your area who can provide a free, personalized consultation.
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