Alternatives to Bankruptcy

Alternatives to Bankruptcy

As an alternative for filing bankruptcy, consider putting yourself on a strict budget, and asking all creditors to reduce or eliminate interest rates. If your debt is less than $10,000, this may be your best option, particularly if your credit is still in good standing. If your credit is already shot, or your debt is simply too much, this is not a realistically helpful option.

Debt Settlement and Debt Negotiation

Hiring an attorney in Oklahoma for debt settlement is an option that you may wish to consider. Often, creditors will accept 50-75% of the amount you owe them as payment if full.

Generally, this option is best for those who have a substantial amount of debt, but also have some assets that can be liquidated for purposes of negotiation. Suppose you have income or assets such that you would be ineligible to file for Chapter 7, or that you avoiding a bankruptcy filing is extremely important to you. In these cases, where Chapter 13 is your only bankruptcy option, settling you debts by hiring a lawyer to negotiate on your behalf may worth considering.

Typically, the type of client that we have found to be best suited for debt negotiation is an entrepreneur or someone who has historically had high income but who has fallen on a few years of hard times. This person has some assets left, but wants to salvage the situation.

The benefits of settling with creditors are that 1) you do not have to file bankruptcy 2) it is quicker and cheaper than consumer credit counseling 3) it is simpler and quicker than many chapter 13 plans, and 4) it is not done in Court so you have more financial privacy.

You are a good candidate for debt settlements if you have a lump sum of cash to offer to your creditors (generally 50-75%), you feel strongly that you do not want to file bankruptcy, and most of your debt is credit card debt.

The down side of this strategy is that your credit will still be negatively affected and that you lack the protection of the bankruptcy court. Also, there may be tax consequences to settling debt, although often there is no tax impact. Mr. Mix will review your situation, along with an Accountant to provide an estimate of your tax liability, if any, of debt negotiation. It can be complicated, and your chances of success are enhanced when done by an experienced Oklahoma debt settlement attorney. Jeremy can give you consultation on this option if you think you may be a candidate for debt negotiation and settlement. Mr. Mix often negotiates with creditors as a primary alternative to bankruptcy.

Consumer Credit Counseling

A credit counseling plan is one where you make one monthly payment to an organization and they pay your creditors. The idea is that the monthly payment you make to them is less than the total of your minimum monthly payments of your debt.

If you are considering alternatives to bankruptcy, first I would like to say that I respect your interest in paying back your debt. This may be a good idea if your debt is under $10,000 and you feel strongly about paying back your debt.

But before you sign up for a consumer credit counseling plan, there are a few things you should know. First, you will be required to make a difficult monthly payment for usually about 4-5 years. These organizations put you on a strict budget. They do not allow much room for the miscellaneous things such as when your car breaks down, your mom’s birthday, etc. So you are strapped for cash for the duration of the plan.

Two, these plans look just as bad on your credit report as a bankruptcy does. Ask any person in finance and they will tell you that as long as you are in consumer credit counseling you will be denied credit. Also, you can’t qualify to purchase a home in consumer credit counseling at market rates of interest for years. With Bankruptcy, you can qualify after one year if your credit has been spotless since the bankruptcy.

Three, you cannot begin to rebuild your credit until after the plan is over, about 4 years or more. With a bankruptcy, you can begin to rebuild your credit immediately. Four, they handle mainly credit card debt, and may not help you with things like medical debt, secured debts such as your house or car, court judgements, homeowners association assessments and most collection accounts.

So, if you are asking me what is in YOUR best interest, consumer credit counseling is not usually it. This is contrary to logic and I will tell you why. You would think that if you paid back your debt that your credit report would be rewarded in some way. This is not so. With consumer credit counseling you struggle for 4 more years and your credit is shot. It is the worst of both worlds.

If you were rewarded in some way for your efforts, my advice would be different. But the reality is, that the incentives are set up in the creditor’s best interest, not yours. Why? Because these organizations were originally set up by creditors. They needed a way to find people who were no longer answering their phones when creditors called. So they formed these organizations so these individuals who are in debt would walk right in the door. Refinance Your Home If you own a home and have substantial equity refinancing may be able to help you. Refinancing is an alternative that can either help you or severely hurt you. I will give you examples of each case.

Help: If you have a great deal of equity in your home (say 100k or more), it may be a good idea to refinance. The reason is that it may be your only alternative short of selling your home. You can’t qualify for a Chapter 7 with this much equity, because the limitation is $45k plus the cost of selling the home- so about $60k. If you were to file a Chapter 13, you would have to pay back the amount of equity over the exemption and selling costs (100k less 60k = 40k). To pay back 40k in a Chapter 13 plan would require a payment of $1000 per month or more. You might be able to do better than this if you were to refinance.

In most cases, however, refinancing is be a poor idea. The reason is that you are taking unsecured debt which is dischargeable in bankruptcy and turning it into secured debt that you cannot get free of. If you refinance the home and pull out equity, your new mortgage payment will be obviously be higher than it is now. Down the road, you may find that you really cannot afford the higher mortgage and that you have no choice then but to sell your home. If you then come to me and tell me that you cannot afford your monthly payments, you may no longer have bankruptcy as an option (because you have given collateral for all of your debt).

I met with a client who bought their home for about $98,000 with a mortgage of about $800. Then they refinanced it twice over the years and now it is worth about $189,000 and they owe about $200,000. Their mortgage was now $1800. Then they fell on hard times and could afford the new higher mortgage. They were forced to walk away from their home. Had they instead filed bankruptcy the first time they refinanced, they would have been free of all the unsecured debts, and their mortgage payment today would still be $800.

Doing Nothing

Note that the statute of limitations in Oklahoma to collect a debt is 3 years for open accounts and 5 years for written contracts, sale of goods governed by UCC and 5 years for judgments. So once you make it past the statute of limitations a creditor cannot legally sue you for the debt (they can still call you and write you though). However, you must keep in mind that derogatory information can remain on your credit report for 7 years from the date of last activity before it falls off.

If this sounds like your situation, you may be best off to wait and see if any creditors pressure you with a law suit. On average, only 1 in 4 will sue you anyway, and you may be able to settle your debt with the one or two that finally sues you. If too many of your creditors sue you, then you can file bankruptcy as a last resort.