Filing for bankruptcy is an excellent way to immediately relieve a person of their debts, and to either have those debts wiped out (Chapter 7) or to develop a long-term plan to repay them (Chapter 13). However, there are some important disadvantages to filing for bankruptcy, including its effect on one’s credit history and the ability to file again in the future.
Before making the decision to file, it’s best to consider some alternative options that may provide similar relief for a person struggling with debt.
Credit Counseling
A great place to begin when considering how to get a handle on one’s debt is with a credit counseling program. In fact, it’s such an important part of any plan to tackle debt that anyone filing for bankruptcy will be required to attend a state-approved credit counseling program within 180 days of filing. More information about state-approved credit counseling programs can be found here.
Credit counseling programs provide a starting point for anyone looking to get control of their finances. This is done by sitting with a credit counselor and reviewing one’s personal finances, from their credit score to their debts and income. Once this is accomplished, the counselor may suggest some options for the individual to begin the process of getting out of debt.
Debt Management Program
One option that may be proposed by a credit counselor is developing a repayment or debt management plan. Similar to the process of filing for Chapter 13, a repayment plan developed by a credit counselor will take into account all of a person’s sources of income and all of their debt, and then put together a plan to repay the debts over time in an amount that’s feasible based on the individual’s income.
This plan is submitted directly to the creditors, and if they agree, collection attempts will stop and the debtor will begin making a single payment to a third party who will distribute it amongst the creditors.
There are some disadvantages to a plan of this sort. Generally speaking, plans like this only apply to consumer debts like credit card charges, and will not apply to other debts arising from things like student loans and medical expenses. The plan can run for as many as five years, and during that time the individual will not be able to open any new lines of credit.
It’s important to note that while attending a credit counseling program will not affect a person’s credit score, it’s likely that participating in a repayment plan will. However, repayment plans of this sort will have a less severe effect on credit history when compared to filing for bankruptcy. Nevertheless, if a person’s debt is primarily from credit cards and their income can support a repayment plan, this is a good option.
Low or No Interest Credit Card Transfer
Another potential option would be to transfer some or all of one’s debt to a new credit card with a low or no-interest debt transfer deal. These deals are typically offered to well-qualified applicants (those with decent credit) and can last for up to two years. They also may allow for transfers from multiple sources.
This is a great option for a person who is struggling primarily with high-interest credit cards and needs some time to pay them off. If the balance can be paid off before the transfer deal expires, there can be significant savings from not having to pay any interest on the debt.
On the other hand, this is not a great option for most people. If the debt is not paid off within the transfer time frame it will usually be subject to a high-interest rate afterward. In addition, not all debt can be transferred on to a credit card, including things like student and home loans.
Therefore it’s best to consider this as an option only when someone is dealing with a comparatively smaller amount of consumer debts that are capable of being transferred to a new credit card.
Debt Consolidation
For those with multiple debts from various sources, debt consolidation may be a viable option. This process works by first getting approved for a loan in the total amount of one’s debt. This loan is used to pay off all the other debts, which typically have higher interest rates than the consolidation loan. Once that’s complete, the individual will have a single, lower interest payment to make on a monthly basis.
The viability of this option will depend on a person’s finances, including their current credit score, total debt and sources of income. In essence, it will come down to whether a bank will approve the consolidation loan.
It’s possible to acquire a secured loan, where the loan is attached to a piece of collateral like the individual’s home. This may help get the loan approved, but it carries with it the very serious risk of losing one’s property if they are unable to make the loan payments. Therefore it’s best to consider this option only in circumstances where chances of getting approved for a loan are high.
Mortgage Foreclosure Mediation
New Jersey is home to some of the most expensive real estate in the nation and the high cost of owning property in this state corresponds with a high rate of foreclosures. The state recognizes these issues and has mandated that lenders participate in a mortgage foreclosure mediation process if the borrower requests it.
The mediation process is available for owners of residential real estate that serve as their primary residence and is already in the foreclosure process. During the mediation, the lender and borrower will discuss any options available that would be an agreeable alternative to foreclosure for both parties. Some common results include loan modification, cash for keys and deed in lieu of foreclosure. Read more about mortgage foreclosure mediation here.
Debt Negotiation/Settlement
Sometimes a creditor will agree to accept an amount that is lower than what is owed in an attempt to collect something rather than nothing. This scenario is called a debt “settlement.” In order to accomplish this, the debtor will need to call their creditors directly and negotiate an amount that is acceptable to both sides. If successful, this method will provide immediate relief in the form of reduced payments or completely wiping out the debt for a lesser amount.
It’s important to note that creditors will generally not even consider this option unless a person is already at least 90 days behind on their payments. This makes sense — why would they agree to receive a lesser amount when a person is actively paying in full? By the time someone is 90 days behind on payment there will already be some major negative impacts on their credit score.
It’s also worth mentioning that creditors deal with these sorts of negotiations on a regular basis, and therefore they are generally very savvy negotiators. Speaking with confidence and understanding one’s options will be vital in successfully coming to an agreement. It’s also worth considering having an experienced attorney negotiate on one’s behalf, as it’s likely they will be able to come to a better agreement than anything the debtor could accomplish on their own. Read more about debt negotiation/ settlement here.
It depends. Debt settlements are typically only successful 10% of the time, while the majority of bankruptcy proceedings are successfully completed. On the other hand a bankruptcy may result in assets being sold off unlike in a debt settlement negotiation. The better choice will depend on what the person’s total assets and debts are as well as other factors like the property they want to keep, whether a debt is non-dischargeable in bankruptcy and if an asset can be deemed exempt from bankruptcy.
There are a few important downsides to filing for bankruptcy. The bankruptcy will remain on one’s credit report for 7-10 years depending on which chapter is filed. There will also be a waiting period before one can file for a second time. Most importantly, some debts are not discharged in bankruptcy.
Yes, you can apply for a credit card after filing for bankruptcy, but it may be difficult to qualify at first. Bankruptcies stay on a credit report for 7-10 years, but as soon as the individual starts making timely payments following the bankruptcy, their credit will begin to rise and eventually will reach a point where they are likely to qualify for new credit cards.
Yes, you can still file for bankruptcy if your creditors are unwilling to work out a deal with you. Attorneys experienced in negotiation with creditors may even use the threat of discharging the debt in bankruptcy as a relevant point in securing their client a settlement deal.
It depends. It’s possible to work out a deal with your lender to modify an existing loan, or in the case of a foreclosure proceeding, to enter mediation and attempt to work out a plan with the lender. The lender will need to agree to any proposed plan or modification, and they will only do so if it’s demonstrated to be in their best interests, i.e., they would make as much or more of what is owed to them when compared to foreclosing on the home.
Taking No Action
One last option to consider is to take no action at all. This option only works for a person who is “judgment proof,” or in other words, for someone who has no assets that a creditor could take in a lawsuit, and no income that they could garnish through a judgment. The debt will also have to be unsecured, as a creditor with any secured debt will move to repossess the property securing it as soon as payment stops.
Taking no action doesn’t solve the original problem, it merely delays it. Judgments last for ten years and can be renewed by creditors in certain circumstances. Any improvement to one’s finances, while they have a judgment against them, will spur a creditor into new attempts to try and collect.
This option will also wreak havoc on a person’s credit score, making it near impossible for them to get a credit card or take out a loan in the future. Certain professions also require disclosure of any judgments against a person before gaining employment.
For these reasons, it’s usually best to consider other alternative options or filing for bankruptcy. At Rosenblum Law our attorneys can help you determine the best option based on your circumstances, call us today.
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