Thrush and Rohr - Attorneys at Law

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Non-Bankruptcy Options: Debt Settlement and Consolidation

If you do not qualify for a Chapter 7 bankruptcy or wish to avoid filing bankruptcy, Attorney Bankruptcy Services also offers non-bankruptcy alternatives to solve your debt problems.

Non-Chapter 7 bankruptcy alternatives take many forms:

Debt Settlement
Settle credit accounts at a discount by utilizing cash to pay your credit obligations in full. This may be accomplished by borrowing money from the equity in your home, or from family, friends or third-party lenders.

Debt Consolidation
A service offered by either for-profit or non-profit organizations, who work with your creditors to lower your interest rates and help establish a repayment budget. (These programs may be called “credit counseling” or “debt management plans” or “debt adjusting plans” depending on the agency or company involved.)

Debt Repayment in Chapter 13 Bankruptcy
A Chapter 13 bankruptcy allows you to repay all or a portion of your debt based on your income, expenses and assets. Depending on your income, a Chapter 13 plan can repay most, non-fraud related consumer debt over 3 to 5 years.

1. DEBT SETTLEMENT
A debt settlement or offer and compromise involves the negotiation with your creditors by Attorney Bankruptcy Services to achieve discounted settlements on your credit accounts. An offer is made to your creditors of a discounted cash sum to settle your credit account in full. Depending on the creditor, accounts are typically settled between 25-75% of the principal amount owed by you.

The key component in an offer and compromise case is cash. You must offer a cash sum to the credit card companies and/or other creditors to reach a discounted settlement. With cash, you gain substantial leverage in negotiating with your creditors.

The source of the funds to pay creditors in an offer and compromise case can be from cash savings or borrowing. Borrowing money from friends, family or third-party lenders may provide you with substantial savings on the principal and interest due and owing to your creditors.

Furthermore, if you own equity in a home or other real property you may utilize the equity to borrow the cash sums to fund an offer and compromise case. Not only is the interest in an equity loan far less than consumer credit, but also the discounts you may receive on your credit accounts can amount to substantial financial savings to you. Many people, however, find that they end up in worse shape by using their house as a “piggy bank”. The economic reality of a refinance is that people trade an unsecured debt for a secured debt. If you default on a credit card balance, the creditor (if you ignore the problem long enough) can sue you and obtain a court judgment. Then they can put a lien against your house, so that if you ever sell the house, you’re forced to hand over the money. But a consumer creditor usually will not force the sale of your house, as it is quite expensive to do so. A secured debt is a far more serious matter, because you’ve pledged your house as collateral. If you default on a debt that has been secured by your house, then you risk losing that home.

Why trade unsecured debts for secured debts? For some people with little to no equity, a refinance may not be your most financially sound option.

2. DEBT MANAGEMENT PLANS
The third variation on “debt consolidation” is not really consolidation at all in the true sense of the word, as described above. Instead, you are enrolled into a debt repayment program. You meet with a counselor who analyzes your monthly budget. The counselor then makes contact with your creditors (although all creditors may not agree to payments) and attempts to get them to lower the interest rate. You make one monthly payment to the agency, which then disburses the funds to your various creditors.

The theory here is that your overall payment per month is lower due to the counselor’s success at obtaining lower interest rates and more favorable terms with the credit card banks. This approach is the one most often recommended by the banks themselves, and in the financial press these debt repayment plans (through “non-profit” agencies) is touted as the cure-all for debtors who are in over their heads.

So, does this really work? Well, maybe yes, more likely no, depending on your situation. More than half of all who enroll in such programs drop out before finishing the plan. First, you have to understand that these agencies actually receive most of their compensation from the bank you owe the money to. So, whose side are they really on— the side of the consumer who’s paying a monthly $20 administrative fee, or the bank that’s paying 8% to 15% of the restructured debt in the form of a kickback? Second, these agencies say that they can have your interest rates lowered, and they may or may not be able to do so, as there is no requirement that a creditor agree to a consolidation plan. In fact, many industry critics view such agencies as debt collection companies in disguise.

Second, most counselors are not going to work all that hard at getting an uncooperative bank to cooperate. The net result is that they simply enter into a typical hardship program that you could have easily obtained for yourself without the extra fees.

Third, with a debt management or debt repayment program, the most frequent complaint we’ve heard from ex-participants is that they have little or no insight into what the agency is actually doing on their behalf, and they have virtually no control over the process. They send in their single monthly payment, with no idea of how much is going to which creditor, and since most counselors are busy people who work based on high volume, getting a return phone call can be difficult.

An example at our firm: A client retained a consumer credit counseling agency to resolve about $25,000 in credit card debt. After enrolling in the consumer credit counseling program and paying over $700.00 per month for 5 years ($42,000.00), our client’s credit card debt remained at $25,000.00 5 years later.

Like any business, there are good and bad services out there. However, they don’t really SOLVE the problem at all. In other words, if you walk into the office of a debt consolidator owing $25,000, you may still owe $25,000 when you walk out.

3. CHAPTER 13
The final form of “debt consolidation” is actually not consolidation at all, but rather a form of bankruptcy called “Chapter 13.” A Chapter 13 bankruptcy consolidates all or most debt into one payment to be made to the Bankruptcy trustee, who distributes such payments to your creditors. A Chapter 13 also stops most interest and penalties. While in a Chapter 13, creditors are prohibited from contacting you or taking any collection efforts against you. To find out more about Chapter 13 bankruptcy, click on the Chapter 13 link above.

To receive a free consultation regarding your (or your friend or family member’s) debt problems, please contact us today.