When you’re dealing with debt, it may feel like you don’t have options. You’re afraid that you’re arnoing to end up in court, which can lead to bank account levies, property seizure, and wage garnishment. Thankfully, that’s not your only option. Debt doesn’t have to land you in court.
Work with Your Creditors
Your first line of defense when dealing with debt is to reach out to your creditors. Ideally, you should talk to them as soon as you know you’re going to miss a payment. Creditors don’t want to go to court, either. It’s expensive and time-consuming and there’s no guarantee about the outcome. It’s better for everyone if you continue to make payments. Your creditors will likely be willing to work with you on your debt.
Some creditors will allow you to work out a payment plan to catch up on your delinquent payments and continue making payments in the future. Some may even be willing to forgive some of your debt, especially if the debt is from a purchase money loan (however, there may be tax consequences if they agree to do this). They may be willing to give you a lower interest rate or a grace period of a month or two in which you don’t have to make your payments, after which you would start making your regular payments again.
If you’re struggling to make your payments, contact your creditor and explain your situation. Maybe you or a loved one had a serious illness or accident. Maybe there was a natural disaster. Maybe you lost your job. Be honest and upfront with them and ask them to try to work something out so that you don’t default on the debt.
If you’re struggling with high-interest debt such as credit card debt, you may benefit from debt consolidation. When you consolidate your debt, you borrow from a different source with a low interest rate to pay off your high-interest loans. For example, you may take out a low-interest home equity line of credit and use it to pay off your credit card debt. You’ll end up paying far less in the end than you would if you continued to make your regular high-interest payments.
Debt consolidation isn’t for everyone. Most importantly, you must have a reliable source of income to make payments on the new loan. If you still won’t be able to pay off the debt after a consolidation, it may not make sense to go through the hassle and expense of consolidating your debt. You also need a source of low-interest debt. A home equity loan may be a good option, but that means you have to own a home. You may also be able to take out a bank loan, but approval will be difficult if you’re already struggling with debt.
When considering debt consolidation services, make sure you check into the companies. Some are disreputable and will collect fees only to leave you in the lurch. Some of the best debt consolidation companies offering their services in California are National Debt Relief, CuraDebt, and American Debt Enders. These companies have experienced counselors, fair fee structures, and excellent track records. Each debt settlement company will have different eligibility requirements regarding the types and amounts of your debt. Remember though, in almost all cases, creditors participate in debt consolidation programs voluntarily. That means they do not always have to stick with it and can pull out of the agreement when they want.
Debt Settlement Companies
If you don’t have any luck working with creditors yourself and debt consolidation is not an option, you may choose to work with a debt settlement company. Debt settlement companies negotiate with creditors on your behalf. They attempt to get creditors to agree to a settlement in which you’ll pay one lump sum in satisfaction of all of your debt. Debt settlement companies generally advise you to stop making payments on your debt and instead save the funds for the lump payment. If they reach an agreement with the creditors, you’ll pay the lump sum and the remainder of your debts will be forgiven.
Remember that creditors are not obligated to work with debt settlement companies. At any point in the process, especially once you stop making payments altogether, your creditors may sue you for collection. Debt settlement companies are also notorious for defrauding consumers, collecting hefty fees and promising results and then failing to get them. When looking for a debt settlement company, look at the fee structure. A reputable company will not charge you any fees whatsoever until you reach settlement. That means no fees upfront and no monthly fees. Check the company’s credentials. Look for members of the American Fair Credit Council. Read consumer reviews online to see if other people have been happy with their services.
Chapter 7 Bankruptcy
The above options all include serious risks. Creditors may not be willing to work out an agreement with you. Debt consolidation may not be an option; even if you do qualify, you may just end up delaying a default rather than preventing it. Debt settlement is never guaranteed and you run the risk of being defrauded. There is only one risk-free option that comes with the full protection of the law: bankruptcy.
Consumers are generally loath to consider bankruptcy as an option. True, it does impact your credit score. However, your credit score is already dropping if you’re not making full payments on your debts. Bankruptcy is a way for debtors to start over with a clean slate.
When you file for Chapter 7 bankruptcy, you turn over your nonexempt property to a court-appointed bankruptcy trustee. The trustee sells this property and gives the proceeds to your creditors in payment of your debt. California offers two different sets of exemptions, each of which will protect the majority of your property. In most cases, all the assets are protected and the debtors lose nothing but their debt. In other words, you will likely keep all of your belongings. When all of the nonexempt property has been sold, the court discharges the remainder of the unsecured debt. That debt is simply gone. No one can sue you for collection. No one can garnish your wages or levy your bank accounts.
Bankruptcy offers the additional benefit of the automatic stay. When you file for bankruptcy, the automatic stay stops all collection efforts against you. Any lawsuits for collection stop, as do repossessions and foreclosures. The court wants to make sure that when you file for bankruptcy, all of your debts are treated through the bankruptcy system, so bankruptcy trumps any outside efforts at collection.
Chapter 13 Bankruptcy
If you have a steady source of income, you may be able to file for Chapter 13 bankruptcy. Chapter 13 bankruptcy cases still get the benefit of the automatic stay, but none of your property is sold. Instead, you work with the court and your creditors to create a payment plan that will last for three to five years. The court will consider your living expenses and make sure that the payment is reasonable; it’s based on what you can pay and not on what you owe. At the end of the plan, your remaining debt is discharged. Chapter 13 gives you the time and protection of the court to catch up on your finances.
If you are capable of maintaining a Chapter 13 payment plan, you’ll be required to file under Chapter 13 rather than under Chapter 7.
What Should You Do?
Dealing with debt is miserable, but you have options. You can work on your debt on your own, with the help of a company, or with the help of the court. Don’t let your debt go so far that you end up in court.
Filing for bankruptcy is a serious decision. If you’re struggling with debt, reach out to an experienced bankruptcy attorney to discuss your options and decide on a course of action that best fits your situation and needs.
M. Erik Clark is the Managing Partner of Borowitz & Clark, LLP, a leading consumer bankruptcy law firm with offices located throughout Southern California. Mr. Clark is Board Certified in Consumer Bankruptcy by the American Board of Certification and a member of the State Bar in California, New York, and Connecticut. View his full profile here.