Based on Federal Reserve Statistics, American consumers currently owe approximately $12 trillion dollars in personal debt.  The three largest areas of consumer debt, in order, are mortgages ($8.2 trillion), student loans ($1.2 trillion), and credit card debt (approximately $900 billion).  Considering the staggering amount of outstanding consumer debt, it is not surprising that more people than ever are seeking debt relief.  Often people make the mistake of not seeking relief soon enough or not becoming informed of the various options available. Contrary to what the credit industry may portray, most people want to pay their bills and often delay seeking advice as they believe they can pull out of their debt issues on their own without professional guidance.  When deciding which type of relief is best for you, it is important to educate yourself. While a Chapter 7 or Chapter 13 may often be the best solution, it is not always the only solution and there may be reasons why filing is not in your best interest.  Under Federal Law, Bankruptcy Attorneys are classified as debt relief agencies.  An experienced bankruptcy attorney can review your various options with you and help you decide which is in your best interest.  The main options for dealing with debt relief are listed below, but remember it is always a good idea to get advice from an expert, especially when the consultation is free!

Bankruptcy

One of the main benefits of bankruptcy is the automatic stay which is a court enforced “time out” that stops all collection activity, including phone calls, law suits, foreclosures, repossessions, garnishments and levies.  The bankruptcy options for Chapter 7 and Chapter 13 debt relief are described fully on this website, but briefly:

            Chapter 7

  • Is the quickest, least expensive form of bankruptcy and stops lawsuits, garnishments, collection activity, harassing creditor calls
  • Discharges most unsecured debts (credit cards, medical bills, etc.) if you qualify
  • Is best for people who are current on secured debts (houses, cars), do not have secured debt or do not wish to keep the secured collateral
  • Is income sensitive depending on your family size and median income
  • Can be a valuable tool in dealing with business debt or recovering from debt resulting from a struggling business

Chapter 13

  • Can stop foreclosures, repossessions, lawsuits, garnishments, levies, collection activity and harassing creditor calls
  • Allows you to reorganize you debt into a repayment plan
  • Is an effective tool for people who do not qualify for Chapter 7 due to above-median income or non-exempt assets which they want to keep
  • Can help with IRS debt 
  • May be able  to strip second liens
  • May help keep business while reorganizing debt

Credit counseling

Credit counseling organizations are usually non-profit organizations that advise you on money management. An initial counseling session usually lasts about an hour.

 Although most of them are non-profit, credit counselors usually charge fees. Credit counselors may help you organize a "debt management plan" for all of your unsecured debts. Under a debt management plan you make a single payment to the credit counselor each month. The credit counselor then makes monthly payments to each of your unsecured creditors.

Under credit counseling, the total amount you owe is usually not reduced, but the monthly payment may be negotiated lower. This is usually accomplished by getting the creditor to increase the time period over which you can repay a loan or possibly lowering interest rates.  Most credit counselors charge fees for their services that they take out of the payments you make to them.

Credit counseling is actually a requirement before filing for bankruptcy.  A reputable credit counselor will take the time to go over your income and expenses with you and attempt to find solutions.  They may either help you organize a debt management plan or they may suggest you file bankruptcy.  It is important to remember that unlike in bankruptcy, all creditors do not have to participate in a debt management plan.  If even one creditor chooses not to participate, you may continue to incur high fees and interest expenses. It is possible that your credit may continue to be negatively impacted if all creditors do not participate.  Your credit may continue to be impacted for years after you finish the last payment under the debt management plan.  Also, a debt management plan outside of bankruptcy will not stop lawsuits, foreclosures, repossessions or garnishments unless the creditor agrees, which is extremely rare.  A Chapter 13 bankruptcy is essentially a debt management plan under Court supervision and protection.

Credit Repair Companies

Be wary of “credit repair companies”.  Many companies target people with poor credit histories, promising to clean up their credit reports for a fee. Anything these companies do for a fee, you can do yourself for free. You have the right to have inaccurate information removed from your credit file.  But regardless of claims to the contrary, no one can remove accurate negative information from your credit report. 

Debt Consolidation

Debt consolidation can encompass many things.  It may mean participating in a debt management plan. It may mean consolidating all of your credit card debt onto one credit card.  Many credit card companies offer low-interest balance transfers. This may allow you to make a single monthly payment and lower your payments for a while.

Be careful, though as many low-interest credit card offers only last for a limited amount of time before your payment increases. Also, if you are late on even one payment the credit card company can increase your interest rate. Most balance transfers are subject to a fee and new purchases on the card are usually charged a higher rate of interest.  If you find yourself doing multiple balance transfers, you are probably “robbing Peter to pay Paul” and it could cost you more in the long run.

Debt consolidation may also mean taking out a new debt to pay off existing debts.  Or it may mean borrowing against your retirement plan or home equity to consolidate your debts.  It is critical that you discuss your options with an attorney before taking any of these steps because you may inadvertently cause matters to become worse, have tax consequences, or risk  losing protected, exempt assets.

Debt Litigation

If you have been sued or are facing the possibility of being sued, it is important that you consult an attorney immediately.  An attorney can represent you in the litigation, if necessary, or advise you on your various options to deal with the lawsuit.  Other types of debt relief cannot give you legal advice and cannot stop the lawsuit.  Usually, if you are being sued by one creditor, other lawsuits may follow soon.  If this is not the case or if you cannot file bankruptcy for various reasons, an attorney can help you find the appropriate way to combat the lawsuit.  It is important that you seek immediate legal advice before a judgment is entered against you.  Even if a judgment has already been entered against you, an attorney can help you stop collection activity such as bank or wage garnishment and can help you if a lien has been placed on your property.

Debt Settlement

Debt settlement companies claim that they can settle your debts for pennies on the dollar. If you’re current on your payments, Debt settlement companies will advise you to stop making payments to force your creditors into settlement. Usually, the debt settlement company tells consumers to make payments to them rather than the creditors while they negotiate with creditors. Debt settlement differs from a debt management plan in that the payments you make to the debt settlement company are kept in a “savings account” until you accumulate enough money for the company to offer a lump sum to your creditor to settle your debt.  Additionally, debt settlement companies keep a monthly fee out of each of your payments.  There are many risks associated with debt settlement companies. Once you stop making your payments, the total amount you owe will increase due to various added fees and interest charges. Also, your creditors do not have to accept a lesser amount than they are owed to settle the debt and many creditors won’t accept a settlement or even negotiate.  For further information about debt settlement companies, visit the consumer financial protection bureau (cfpb) website or the federal trade commission (ftc) website.

While there are many types of debt relief, it is a good idea to consult an attorney who can provide you with legal advice after fully analyzing your particular situation. A good attorney will review all of your options with you and guide you in deciding which pathway to debt freedom is best for you.  Take advantage of a free consultation today.  The sooner you get advice, the sooner you are on your way to debt relief.