Is Bankruptcy My Best Option?

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Joe and Mary have been married for 20 years and have one child in college, one in high school and one in middle school. There is an elderly parent that they help to care for and support. Both are employed outside the home. Speaking of homes, they live in a moderate house in a safe neighborhood. They had the home mortgage paid down but had to take out a home equity line of credit (HELOC) to pay down some credit card debt, purchase a car for the college bound child and pay on unsecured medical bills. Mary’s employment has cut her hours and recently there simply hasn’t been enough income to pay the mortgage, HELOC, car loans, credit cards, utilities (gas, electric, cable and cell phones), college expenses, gas bills for the cars, home and auto insurance (not to mention putting new tires on the older car), clothes, extracurricular activity fees and to take the dog and two cats to the vet for their shots!

So what can Joe and Mary do? What is their best option? If they didn’t have any of this ‘stuff’ and weren’t reasonably employed, perhaps the decision would be easier?

Regardless of your assets, income or family status, a proper examination should be conducted in times of financial struggles.

Putting ‘it’ on paper or in a spreadsheet is the only good way to figure out where you are and to begin charting a course to a debt-free life. The place I like potential clients to begin is with a detailed daily log of all of their expenses. Keep a small note pad handy or use your smart phone to track every purchase. Whether it’s the weekly trip to the grocery or picking up a sleeve of powdered donuts and a coffee at the convenience store while fueling the car – write it down. This information, when tallied at the end of the month, may shock you. Perhaps some spending adjustments can get you on track. If not, this information is still very useful in evaluating debt relief options.

Inventory your assets. Consider their value and utility to you and your family’s life style. Do you have too many vehicles? Could you get by with fewer, thus cutting operating, ownership and insurance expense? What about TV’s, cable, cell phone and internet services? Are there less expensive alternatives or are you already cutting these things as close as you can?

As you list items, you will quickly begin to see if there is any possibility of maintaining a satisfactory lifestyle while servicing or paying on your debts. Unfortunately, many times massive changes are necessary unless creditors will agree to reducing interest charges, late fees and monetary payments. Even if some creditors will work with you, often times others won’t cooperate, and the money crunch remains.

So, how do you fix the problem? There is no simple solution, but there are solutions.

First, I never discourage clients from contacting their creditors to discuss their accounts and to request reductions in interest rates, forgiveness of debt, late fees and other more favorable terms. I strongly advise against making any lump-sum payments on any one account until the terms are provided in writing and you can consider all of the debts! Solving one debt if you have others doesn’t solve the problem! All debts must be considered together. Also, be mindful that it is uncommon to obtain any meaningful relief on most unsecured consumer debt. Again, be wary of a deal promised on an upfront, lump-sum payment. More than one client has come to our office having been tricked by a seemingly helpful creditor!

If you do not succeed in negotiating your debts down to a manageable sum or simply do not want to interact with creditors and collection agents, then it is time to reach out for professional assistance, but who should you turn to?

TV, radio and social media are ripe with advertisements offering to make you debt-free without filing bankruptcy. Sounds too good to be true? Well, it probably is. There is no silver bullet or “trick” that the credit card companies don’t want you to know. Likewise, there is no law that gives you a right to be debt free outside of the bankruptcy code. These offers are simply marketing gimmicks which will ultimately have the debtor paying a fee for consulting or debt consolidation services.

Is a debt consolidation service the right alternative for me? Candidly, some services are legitimate and offer sound financial advice. They will offer to work with you to establish a budget and will allocate a portion of your income to paying off your debts. Some will reach out to your creditors in an attempt to negotiate more favorable terms (something the individual can certainly do on their own behalf as discussed earlier.) Are debt consolidation services likely to be more successful than the individual – no, not necessarily.

Even with the best debt consolidation service, they do not have any power to keep the creditor form filing a collection suit, garnishing wages or bank accounts, repossessing an automobile or other secured property or foreclosing on a home. Most debt consolidation services also do not work for free, and if they do, there is a good chance they are actually owned by a creditor or debt collection agency, or are otherwise being compensated by them.

So what will bankruptcy do for you? Well, before we declare you to be a bankruptcy candidate, we first review your financial information. Pay stubs,  tax returns, monthly living expenses, lists of assets, real estate holdings, law suits, claims, inheritance, tax refunds, debts (amount, type and creditor), as well as a host of other items, are all taken into account before our office deems you to be a good candidate for bankruptcy.

Assuming that you are a good bankruptcy candidate, we will look at the above factors to determine which chapter of the bankruptcy code will best serve your needs. Thereafter, we will describe to you the details of the process allowing you to make the ultimate decision in what to do.

An important factor to consider is that when you file bankruptcy, you do not have to negotiate with your creditors or obtain their consent or cooperation. Bankruptcy actually puts you in control of the situation. You decide if you will reaffirm a secured debt, such as a home mortgage or auto loan, or will simply discharge the debt and surrender the property. You may find yourself in a position where you can “cram down” an auto loan, reducing the loan balance to the current market value of the car, and may further reduce the interest rate to something near prime!

Filing bankruptcy, most of all, brings peace to an often frantic situation. The Automatic Stay Order issued by the Bankruptcy Court puts a stop to lawsuits, garnishments, repossessions and foreclosures, not to mention the parade of harassing collection notices and phone calls. Believe it or not, it can also improve your credit score.

While bankruptcy is certainly not a cure-all remedy for every financial illness, it does in appropriate instances, revive a person’s, family’s, or business’s financial health. We strongly encourage you to consult a legal professional with experience and training in bankruptcy before moving forward with any debt resolution program.

Posted in: Bankruptcy