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Bankruptcy vs. Debt Consolidation

roads of debtWhen you reach that point where you know you can’t get out of the financial hole on your own, you start looking for options. If you think Bankruptcy is the worst thing that can happen, you might look for other ways to get the debt under control. It’s easy to find companies that perform an array of services, including Debt Consolidation, Debt Management, and Debt Settlement. It’s not always clear what these are, so let’s go over them –

Debt Consolidation is where you take out a lower interest loan to pay off all the higher interest loans – turning many debts into one debt. This lowers your interest, but not the principal, and you are still making payments, and subject to collection efforts. In most cases, you are also paying a fee to the company that is buying your debt, in addition to paying the debt and the new interest to that same company.

Debt Settlement is getting creditors to accept less than the full amount. This is attractive, but it will be reported to the credit agency that you paid less, and this will have a negative effect on your credit rating. In most cases, you are paying a fee to the settlement company for their negotiation on your behalf.

Debt Management is where you agree to financial counselling, and a debt management company will negotiate with your creditors. You pay the debt manager, they pay your debts, and maybe along the way they can negotiate some better terms, or arrange for debt settlement. In most cases, you will pay a fee for these services, in addition to your payments to your creditors.

When facing pressure from creditors, you may think about one of these debt services as a less drastic measure compared to Bankruptcy. And while this may be a good option in some circumstances, it’s important to get the facts. First of all, understand what debt consolidation will NOT do.

You are not under any legal protection with a Debt Service Company. When you file for Bankruptcy, your creditors must stop all collection efforts. The Bankruptcy process protects the Debtor, and insures that all harassment stops, under civil penalty for any creditor who contacts you.

In Bankruptcy, your communications with your attorney are privileged. This means that anything that is said between you and your lawyer are private, and no one can break that confidentiality. You do NOT have this confidentiality with a debt service, and anyone you talk to with the debt service can be called to testify against you in court.

Consolidation does not eliminate your debt, and neither does Settlement. In most cases, the debt service will ease your monthly burden – either by reducing the principal or the interest. That sounds good, but it will still appear on your credit report if the full amount was not paid, which will hurt your credit score. Reducing the interest is a good thing, particularly if you were holding some debt at maximum penalty rates – but this still doesn’t relieve you of the debt.

Bankruptcy sounds like the worst option – but it’s a widely misunderstood legal action. Bankruptcy puts the power of the law on your side, and protects you. Bankruptcy attorneys are your advocates, and they fight for you, while you concentrate on rebuilding. In most cases, a Chapter 7 Bankruptcy will eliminate a lot of your debt. If there are debts that cannot be discharged, the reorganization process will give you an opportunity to structure a better payment plan on the remaining debt. After a Bankruptcy, you can still use a Debt Service to work through the remaining debts.

I realize that Bankruptcy is a drastic measure – but if you are in real financial trouble, drastic measures will yield real results. You will have most or all of your revolving credit debt discharged (there are exceptions to dischargeability, please consult an attorney), and you will have a fresh start. Your credit score will improve, and you can start rebuilding your financial foundation. If you are worried about how the Bankruptcy will affect your credit score – remember that debts that have gone into collections will remain on your credit report for years, but getting those debts eliminated through a Bankruptcy makes you more credit worthy – as it is more likely you can pay off a new loan (and you can’t declare Chapter 7 Bankruptcy again for 8 years). Debt consolidation is a half-solution at best – you will still be in debt, and your credit score will not improve – you just change who you pay each month.

Talk to a Bankruptcy lawyer, and get the facts. Lawyers are required by law and the ethics of the profession to tell you the truth about the law, and your rights. Lawyers are trained and licensed by the state to insure that clients understand their situation – this is not true for debt consolidation. After consulting an attorney, if you still want to seek consolidation, you will be smarter about the options, and better equipped to make the right decision. Contact me at Potter Law Firm. “We’ll get you through it.”

Exercising your right to start over: Bankruptcy.

What do you think of, when you think of the Constitution? Freedom of speech? Right to Bear Arms? Unlawful Search and Seizure? None of these are in the Constitution – they were added later, in the Bill of Rights.

Constitution (Article 1, Section 8, Clause 4)

Constitution (Article 1, Section 8, Clause 4)

But you know what IS in the original draft? The right to Bankruptcy. Article I, section 8, Oversight of Bankruptcy is a required duty of Congress. The ability to start over, with a financial clean slate was so important, it was in the original draft – before freedom of speech, before the right to bear arms, before the guarantee of a jury trial, the framers made sure you could declare bankruptcy. Please keep that in mind.

You have a right to get the protection of the court against your creditors. In a lot of situations, you can have your debts eliminated, and you will have an opportunity to renegotiate the repayment, and at least get a break from the harassment. With so much debt collection abuse – why don’t more people take advantage of the Bankruptcy process? Yes, it’s complicated, but not more difficult than most other legal procedures. I think it’s the stigma – the shame of having to surrender, or the feeling that you have failed in your obligation by not repaying the debt.

If you are avoiding the phone because of creditors, you may be able to get some help before the holidays. The process was established in this Nation by the Founders; it is your absolute right. This
process may be the way you can start over, get a grip on your finances, or just give you some room to negotiate. Your creditors know you can get protection from the court, so they aren’t going to make deals with you until you do.

Here’s some insight on Creditors:

  1. High Interest Rates are the reward the lender gets for taking the risk that you will default. If you were guaranteed not to default, your interest rate would be tiny – like the kind of interest you get on a Treasury Note or US Savings Bond. High Interest means that they assume some are going to default, so they are getting their piece with every interest payment.
  2. Your Credit Score is a very complex calculation, and it takes into consideration what kind of debts you have, and what abankruptcy-sign-postssets you have. If you have a lot of debt that can be discharged in a bankruptcy, and you don’t have substantial assets (like a house, or investments), then you are a candidate for an easy Chapter 7 bankruptcy. The system then ASSUMES you are going to file for a Chapter 7, and it’s the reason your score is so low. The credit reporting agency is telling potential lenders that you will likely file, and once you do file, your score will go up.
  3. Bankruptcy will do a lot to protect you, but it’s still going to change your life. If you are still paying on a car loan, you may be able to get out of the loan – but you will likely lose the car. Yes, it gets rid of the debt, but if that debt has collateral, like a lien on the car title, you could lose that asset. There are ways to keep the car – so this isn’t an absolute rule, but you need to know how to keep the asset, and plan for it.
  4. Chapter 7 is a cleaner way to do it, as it will wipe out many different kinds of debt, but you can only do this once every 8 years. So if you declared a chapter 7 a few years ago, and disaster struck again, you can still file for Chapter 13. This is a much more complex process, and it’s going to cost more to do it – but if you have been backed into a corner again, it’s an option you can exercise.
  5. When you file for Bankruptcy, the creditors have to stop their collection efforts, and deal with your attorney.

If you are in the Greater Phoenix area, the Potter Law Firm may be able to help you. “We’ll get you through it.”

“We are a debt relief agency. We help people file for bankruptcy relied under the bankruptcy code.”