Avoid Bankruptcy – The Usual Options

If you want to avoid bankruptcy, there are many other options for dealing with debt. The options are usually:

• Debt Settlement
• Debt Consolidation
• Hiding from/Avoiding Creditors

Below is a summary of the “big three” alternatives. In order to know which solution is best for you, it is important to speak with an attorney. A lot of people ask me which option is better for their credit score. They are all bad. Different companies will try to sell you the thing ‘they do’ and will tell you that it is better for your credit score. But that is usually just a sales tactic. The truth is that if you don’t pay your debts, your credit score will be injured. Debt Settlement and Bankruptcy injure your credit in different ways, but in my years of experience, one is not worse than the other.

Debt Settlement is when you get really far behind on your debts and then attempt to “settle” with the creditor for less than you owe. So, if you owe a credit card $40,000, we might try to get that debt settled for $15,000.

Sometimes a creditor will give a great deal. Other times the creditor will play it tough- and only give a small discount. Each creditor has its own policy for settlement. To make things more complicated, each creditor regularly changes the policy. Though we have a great track record settling debts for our clients, it is not easy to predict (or guarantee) a particular outcome. Any debt settlement agency that tells you they can ‘guarantee’ a certain amount of savings is probably lying to you. If you read the small print- they will tell you there is no guarantee. That being said, we usually settle for below 50% of what is owed. I have gotten as low as 5% and regularly gotten 10% deals. But the credit cards have gotten tougher over the years. A really important part of debt settlement is knowing when to settle. After a while, the credit card company will sell the debt to someone else.

Sometimes the best settlement is just before that transfer. Other times, we want to wait until the debt is owned by another company. Another important thing to understand about debt settlement is that the truly great deals only happen when you can make a lump sum payment. So, if you want to settle your debts, but can’t come up with large chunks of money, you are probably not going to have a great outcome.

What About Debt Settlement Plans with Monthly Payments?

Most of the time, a debt settlement program that takes monthly payments from you is the biggest scam going! A lot of debt settlement companies will say “pay us $300 per month(or some other amount) and we will take care of your debts” They will show you a schedule of how everything will work. Beware. This is often a scam.

First of all, companies that do this usually take your first $1500 to $2600 of payments and put it in their pockets. Then they start applying your payments to a fund where they wait until you have built up enough money to settle. But if you owe $10,000 to a credit card, it will take years before you will build up enough money to really settle your debt. What happens during that time? The creditor will sue you, garnish your wages, freeze your bank account, contact your employer and friends and family etc. Your debt settlement company will show you more ‘small print’ where they tell you they do not represent you in legal actions. Then you will end up filing bankruptcy anyhow. What about the thousands of dollars you paid the debt settlement company? The money is gone. There is no lawyer who will take your case to sue the debt settlement company for a few thousand dollars. But worse than the money is the time you lost. If you had just filed bankruptcy from the start, you could have been done in a month.

Many people who call me for help have been in debt settlement for years. Don’t get me wrong- I love doing debt settlement. But if a client can qualify for bankruptcy, it is almost always better to file bankruptcy. And I won’t take monthly payments for debt settlement except in rare exceptions. Long-term debt settlement plans just don’t usually work and I don’t want to get hired for something that is doomed from the start. If you can’t qualify for Chapter 7, and you don’t have funds for Debt Settlement, then you should consider Chapter 13 bankruptcy (which is a court-managed debt repayment plan) or one of the options below.

The first thing to remember about Debt Consolidation is that you would be paying your debt in full. Where debt consolidation helps is that is saves you interest (sometimes) and gives you more time to repay your debt (usually lowering your monthly payment). We help clients do this sometimes, but it is usually not a great option. The first sort of debt consolidation is when you get one big loan and use it to pay all your other debts. Then you have just that one monthly payment. If the big loan is at a low interest rate than it could be a benefit. But often, these “consolidation loans” are not at such a great rate. But the scam to watch out for is the debt consolidation companies. They often say they will “consolidate” but they don’t.

You put your debts out of mind and bam! Suddenly you are getting sued by a creditor. At that point the consolidation company either stops taking your calls or directs you to read the small print where they tell you they are not responsible. This is another reason why bankruptcy is superior if you can qualify.

Judgement Proof

Judgement proof is the term for a person who has nothing to lose to creditors. It is when you have so little, that there is really nothing that the creditors can do to you. I hear it every day. “I don’t have any house or car and my only income is social security and the banks can’t touch that”. It is true that someone with no assets is judgment proof. But I always tell clients to beware. Sometimes in life we get a windfall. Once you get a windfall, you are no longer judgment proof. Then, the banks will take your windfall. What is a windfall?

Real Examples of Windfalls

Each of these examples really happened to one of my “judgment proof” clients. You win $20,000 in the lottery. The check hits your account- then creditors freeze and take the money. You get nothing. You inherit something unexpectedly. Then you have to repay your debts 100%. You get in a car accident or get hit by a car, or have a slip-and-fall. As a result, you have a really nice lawsuit and can take home $50k or more. Now, because you didn’t already file bankruptcy, your credit cards get all that money. It becomes a nightmare.

In October 2018 I had a client named Janet call me. She had reached out to me years before in 2015. At that time (in 2015) she and had about $40,000 in credit card debt and medical bills. I tried to get her to do bankruptcy back then (and it would have cost about $1300). She had no assets and was on disability. She said she was “judgment proof” and didn’t need a bankruptcy. I didn’t hear from her again until 2018. She called because she was in a panic, the creditors had frozen her bank account. How did this happen?

In 2016 she got hit by a city bus. Her lawsuit from that accident was worth about $60,000 to her. If she had filed bankruptcy in 2015, then that 2016 lawsuit money would have been all hers. But she lost almost all of it. When the money hit her account (she got check for $38,000) her biggest creditor froze her account. The creditor had already taken the money out by the time she called me and there was nothing I could do to get it back. Because she didn’t file bankruptcy when she could in 2015, she lost all the lawsuit proceeds except for $15,000. Think about that, she could have spent $1300 in 2015 and gotten a check for $38,000 in 2018 and kept it all. But she blew it. She was so sure that she was “judgment proof”. But she was wrong. None of us can predict the future. That is why if you can eliminate your debt with an easy Chapter 7 bankruptcy, it is very risky to put it off, even if you think you are judgment proof.

The first thing to know about Asset arrangement or Hiding Assets is that it is a very risky business. Firstly, when you intentionally hide or transfer assets so to avoid creditors, it is considered fraud. So, if you get caught, the transfer can be undone and you can be liable for damages. In NY, for example, they look back six years. So, if you think you can transfer your house to your brother today, and file bankruptcy in a year or two, you are in for a terrible problem.

Our firm does not participate in this sort of stuff, but we can advise you of the risks involved. Know that hiding assets is not just a problem in bankruptcy. Even if you never file bankruptcy, if your creditors find out about such a transfer, they can get the courts to undo the transfer. Again, this is a very risky way to deal with your creditors. Because we have such great success settling debts, and because there are various bankruptcy options out there, you should speak to us before trying to hide from creditors, there is probably a better option.