“V” Stands for Bankruptcy Versus Other Debt Relief Options

The typical person overwhelmed by debt really doesn’t know a lot about debt relief options. Most of them, however, seem to innately just “know” that they do not want to file for bankruptcy. It is this fear that is played upon by the debt settlement and debt negotiation outfits. I listen to their ads all the time but because I understand the law, I hear the commercials a bit differently. I find them more interesting not for what they are pitching, but what they fail to disclose to the consumer.

Don’t get me wrong. I am not suggesting bankruptcy is for everyone. I just think that a consumer should understand all their options before they make a decision. For most of the people that sit down and talk with me, bankruptcy becomes the logical choice. Here are some of the biggest differences.

If you need protection from foreclosure, car repossession, lawsuits, wage garnishments, divorce related debt or the IRS, consider bankruptcy. The phone jockey at the debt settlement outfit can’t help you. Period. End of story. If you need help getting rid of medical bills, credit cards, personal loans, and utility bills, the debt settlement guy may be able to get you a reduced balance or more favorable payment terms. Maybe. A Chapter 7 bankruptcy though can get rid of these same debts without any payments or negotiations. It just happens. Poof! Gone.

Remember, creditors do not have to negotiate their debt. Visa does not have to reduce the balance owed just because the debt negotiator called. Maybe they will. Maybe they won’t. Contrast that with a bankruptcy which is a mandatory process. The creditor cannot opt out.

There is also the potential tax liability problem. A debt which is reduced by more than $600 must be reported as income to the IRS which will increase income tax liability. For example, you owe a credit card $10,000.00. The debt settlement company reduces the debt to $2,000.00 which is a great deal. Keep in mind though that the credit card company will send you a 1099 and you will have to pay taxes on that forgiven debt. This is not negotiable. It is mandatory. This is one of the things that gets buried in the fine print. In comparison, there is no tax consequence for debt discharged in bankruptcy. You will not have to pay taxes on it.

Finally, there is the cost. The typical debt negotiator charges around 15% of the debt they settle. So if you have $20,000.00 in debt, there is $3,000.00 in fees. The typical Chapter 7 bankruptcy is much cheaper than that and you don’t have to pay anything back.

Basically, bankruptcy gives much greater protection, works faster, is less expensive and more powerful than a debt settlement. And if you have a skilled bankruptcy lawyer, it is not nearly as scary as you may think. Of course, I am bankruptcy lawyer so what else would I say, right? However, consider this: I can do what the debt negotiator does but they cannot do what I do. So who has more to hide, the lawyer or the debt settlement company?

“V” also stands for;

 

 

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Debt Settlement vs. Bankruptcy: 8 Things You Need to Know.

Which way to turn?
Debt settlement versus filing for bankruptcy: Which makes more sense for you? A lot of my clients consider each to resolve their debt problems and don’t know which way to go. There is no right answer. It is important to know the benefits of each before you jump into it. Once you have educated yourself, it is easier to make the turn.

1.      Cost. A fairly straightforward Chapter 7 consumer filing could cost anywhere from $1,300 to $2,000. This includes costs like the court filing fee, credit counseling, debtor education course and a credit report. A Chapter 13 is generally around $3,000 in attorney fees and about $450 in costs. However, in a Chapter 13, your attorney fees are rolled into the monthly repayment plan and your unsecured creditors usually end up paying it. In a debt negotiation, it is usually about 10% of the debt being negotiated in addition to any monthly fees and must be paid up front before any work is done.

2.      Tax Consequences. There are no tax consequences to discharging debt in either a Chapter 7 or Chapter 13 bankruptcy. Any debt reduced by direct negotiation with a creditor will result in a tax liability. You will get a 1099c for the amount of debt forgiven if it is more than $600. For example, you owe Visa $10,000 and settle for $3,000, you will get a 1099 for $7,000 and will have to pay taxes on it.

3.      Credit Reporting Effect. A Chapter 7 bankruptcy will stay on your credit report for 10 years. A Chapter 13 is 7 years.  An uncollectable, negotiated, or written off debt will stay on your credit report for 7 years. However, the effect on your credit score may not matter if you are considering either. On a side note, I have seen that a bankruptcy usually improves my client’s credit score and that most of my clients get credit card and auto loan offers soon after filing. Why? Because they don’t have any debt and can’t file bankruptcy again anytime soon.

4.      Regulations. Attorneys are licensed to practice law and must report all fees charged to the court. Fees are approved by the judge and if not earned or too much, the attorney may be ordered to refund the client. Debt negotiators are not licensed, do not have to have any special qualifications, and are not regulated.

5.      Creditor Harassment. Once you file for bankruptcy protection, all creditor harassment must stop because of the automatic stay. Any relief sought by a creditor must be before the bankruptcy court. They may not call you; write you; or contact your family, friends, or your job. They cannot sue you or continue a lawsuit. They cannot garnish your paycheck, bank account, or tax refunds. If they violate the automatic stay, you may be entitled to money damages. When you are negotiating a debt, the creditors may do all of the above without restriction.

6.      Effectiveness. A successful bankruptcy eliminates debt except for things like domestic support obligations, some income taxes, and student loans. You will get a court order discharging the debt. In a Chapter 7, maybe in as little as four months after filing. In a Chapter 13, after your payment plan which can typically last anywhere from three to five years. A bankruptcy usually resolves all of your debt issues. A Chapter 13 can save your house from foreclosure or stop a car repo and even get rid of a second or third mortgage. In a debt negotiation, each creditor will be negotiated with individually with focus on the word “negotiate.” You have no right to negotiate your debt. None. Doesn’t exist. I have heard the ads, too. I have also read the law. You do not have a right to negotiate a debt. Bankruptcy is a Constitutional right. Creditors must participate. The debt is eliminated whether or not they like it.

7.      Privacy. A bankruptcy filing is public record and, while unlikely, anyone can find out about it. A credit management is private except for the notations on your credit report.

8.      Payment Plans. There is no payment plan in a Chapter 7. If you are eligible, you will get a discharge with no further payments. A Chapter 13 is a lot different in that you determine what your monthly living expenses are and your disposable income is paid to your creditors for the length of the plan. In a debt management plan, you are told how much you have to pay and then have to budget your life around it. These are opposite concepts. In a debt management plan, your monthly payment is the priority debt. In a Chapter 13, payment to your unsecured creditors has the lowest priority.

Unfortunately, I don’t know about all the successful debt management plans people do because I get the people that get ripped off, that are getting sued by the creditors after an agreement is reached, or can’t afford the monthly or lump sum payments required by their creditors. I can tell you bankruptcy absolutely works and that is the one thing that your creditors don’t want you to know.

To learn more about bankruptcy and what I can do for you, please take some time to read The Bankruptcy Book.

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Debt Forgiveness, Taxes, and the 1099c

Analyzing Financial DataBankruptcy can avoid taxes on debt forgiveness and avoid the impact of a 1099c. Let’s say you are working with a debt negotiator or a collection agency and work out a favorable deal. You negotiate a debt from $25,000 down to $2,500 (which I just did for a client recently.) Sounds great. Well, it can be but only if you know the rest of the deal. The 1099c is the part that the debt negotiator doesn’t tell you about or puts in the “fine print.”

The amount forgiven is considered taxable income by the IRS and the creditor is obligated to report it to the IRS if the amount forgiven is more than $600.  The creditor will issue a 1099c. In my guy’s case, he will get a 1099c for $22,500 and have to pay taxes on it which is fine as long as you know that going in and take it into consideration. Here is the IRS publication with some details.

You won’t always have to pay taxes on the amount forgiven. The exceptions:

  • the debt was a non-business debt and was canceled before 2007 as a result of Hurricane Katrina
  • a student loan was canceled because you worked in a profession and for an employer as promised when you took out the loan
  • the canceled debt would have been deductible if you had paid it
  • the cancellation or write off of the debt is intended as a gift (this would be unusual)
  • you discharge the debt in a bankruptcy proceeding
  • you were insolvent before the creditor agreed to settle or write off the debt

If you cannot afford to pay the taxes on it you better not agree to it because you do not want to owe Uncle Sam.

These rules also apply to deficiencies after a foreclosure or short sale. It sounds pretty unfair to get a 1099 after you lose your house.  Under the Mortgage Forgiveness Debt Relief Act of 2007  certain loans will be partially or wholly forgiven from 2007 through 2012. If the real estate is your primary home and the loan was for the purchase or improvement, then there is no tax consequence. If the loan was for investment property or used for something else, e.g., you took out a second mortgage for a credit card consolidation payment, you are going to pay taxes on it.

Bankruptcy may be a good alternative to negotiation. There are no tax consequences to discharging your debt or surrendering a house in a bankruptcy. None. In a Chapter 7, you can discharge all your debt, pay your creditors nothing, and not have any tax consequences. If you negotiated a debt, you may want to file for bankruptcy before the 1099c comes, especially if didn’t know about it and aren’t ready.

Keep in mind, I am just a bankruptcy lawyer and not an accountant. If your accountant knows more than I do, take his word for it. I am just bringing this issue to your attention because it takes a lot of my clients by surprise.

To learn more about bankruptcy and what I can do for you, please take some time to read The Bankruptcy Book.

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Debt Reduction, Credit Card Negotiation, and Your Rights.

credit cardsThere is no legal right to debt reduction or credit card negotiation  if you owe  more than $10,000. Any ads promoting debt and credit card reduction are misleading. I hear them all the time on TV and the radio. I get the spam ads on the internet. You have heard the commercials:

  • Do you know if you qualify for a credit card bailout?
  • If you have more than $10,000 of credit card debt you have the RIGHT to settle that debt for a fraction of what you owe, with monthly payments you can afford.
  • Credit card companies have been given billions and need to clean their books once and for all and that’s great news for you.

Well, I have heard them too and I spent some time looking into it. If I were generous, I would call the debt reduction claims misleading but I am not so I will call them lies. Each one of those statements are provably false.

Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 or Credit CARD Act of 2009. Have you looked at one of your credit card statements and noticed that it now tells you how long it will take to pay off your credit card if you just make minimum payments? That’s a new requirement and a good idea, in my opinion.

I took some time to look the Act over. Nowhere does it state that the consumer has a right to have debt reduced if it is more than $10,000. It’s just not there. You can look it over  here. I am not alone in calling them out. The Federal Trade Commission at their website points out that:

There also is no guarantee that a creditor will accept partial payment of a legitimate debt. In fact, if you stop making payments on a credit card, late fees and interest usually are added to the debt each month.

I have literally dozens of clients that have hired me after they have tried one of these debt negotiators. The stories are all the same. They are told not to hire a lawyer and to stop making their credit card payments and start making payments to the debt negotiator. When the credit card sues for nonpayment, the client calls the debt negotiator who tells them that they aren’t lawyers and the client needs to hire one. What?! I thought they didn’t need a lawyer.

These negotiators charge too much, do too little, hide the facts and mislead the consumer. I feel really bad the clients that have hired me after they used a debt negotiator. Most people really try to pay the creditors back and are just looking for help. They believe the debt negotiator because they want to believe this is a realistic option only to find out that they are being taken advantage of. It’s a shame because there is help for someone overwhelmed by debt, just not with these negotiators.

We don’t negotiate debt. We eliminate debt. I don’t call one creditor and ask them if they would consider a payment plan or no interest for a while. We use the powerful bankruptcy laws to put you on equal footing with a creditor, no negotiation necessary.

To learn more about bankruptcy and what I can do for you, please take some time to read The Bankruptcy Book.

If you like this blog posting, please recommend it and share it with others.

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