When a person owes money they are called a “debtor.” A person or company who is owed money is termed a “creditor.” These definitions are important because they will be used throughout this article (and this blog). This is one of the few areas of the law where the parties aren’t referred to as “plaintiff” or “defendant.” When a debtor is in over their head financially it may feel as though they don’t have options, but they do because they have what the creditor wants…money. Although it seems strange, that is the leverage that attorneys like myself use to get deals done. Below is a brief overview of some of the methods I use to assist my clients in getting a financial fresh start.
The first thing to do when it comes to debt relief is to simply ask the creditor if it will take less to settle the debt. A good settlement amount usually ranges between 35-50 percent of the total debt, but depending on the situation it can be more or less. Debt settlement payments are usually lump sum payments. It is very difficult to convince a creditor to settle for less than 80 percent of the total debt before they have turned it over to a collections agency. However, collections agencies usually are paid a percentage of what they recover and, therefore, are very motivated to settle the debt. It should be noted that a debt must be several months past due before a debtor is contacted by collections agency and that will undoubtedly hurt a debtor’s credit score.
Another down side to settling debt is that any debt that is forgiven is considered income and a debtor will later have to pay taxes on the amount forgiven. However, paying taxes on $10,000 is better than paying back $10,000. This does not apply to debt discharged in bankruptcy as discussed below.
Another avenue to be explored is to see if the creditor will alter the terms of the repayment agreement to give the debtor some breathing room and a chance to catch up on missed payments. Several types of modifications can be sought. The debtor could request the principal amount or interest rate be lowered. The debtor could also seek to have the arrears (the portion of the debt that the debtor is behind on) moved to the end of the loan. Debtors can request a forbearance, which is when creditor agrees to stop collection attempts for a certain period of time. Also, the debtor can request a moratorium on payments, which is where debtor has no obligation to pay for several months.
One problem that arises with this method is that it cannot be accomplished without the creditor’s consent which leaves the debtor at the creditor’s mercy. Loan modifications work best for debt which is secured by big ticket items such as a house or car. A small loan (less than $10,000) usually does not warrant the creditor going through the trouble of determining whether these loan modification options are available to debtors. However, loan modifications can be a great tool in saving a debtor’s home from foreclosure.
The last option is filing for bankruptcy. The beauty of a bankruptcy lies in the ability to achieve debt relief goals without needing the consent of the creditor (unlike the above options). Bankruptcy can be very complicated and I would highly recommend meeting with an experienced attorney before deciding whether to file. There are two types of bankruptcy available to the average consumer debtor, chapter 7 bankruptcy and chapter 13 bankruptcy. A chapter 7 bankruptcy is often referred to as a “liquidation bankruptcy.” In a chapter 7 bankruptcy a debtor must disclose all of his assets and liabilities and then certain assets can be taken from the debtor, sold, and the proceeds of which are distributed to creditors. This sounds scary but it means very little because most debtors don’t have any assets that can be liquidated. In fact almost all chapter 7 cases are deemed no asset cases. I personally have never had a client who had assets taken in a chapter 7 bankruptcy that they didn’t consent to having liquidated. This means there is usually nothing to be sold and the debtor receives a discharge from their debts after approximately 90 days.
A chapter 13 bankruptcy is referred to as a “reorganization bankruptcy.” In this chapter a debtor retains all assets and instead formulates a plan that repays creditors. Debtor will then make monthly payments to a trustee who will disburses funds to the creditors. Not all creditors have to be paid in full and the bankruptcy code provides how each creditor must be repaid. An experienced bankruptcy attorney can assist you in preparing and filing an effective plan.
This blog merely highlights the typical tactics I use to help clients get some much-needed debt relief. Not all remedies are available to every debtor and multiple additional factors that go into deciding the most effective pathway for each debtor. If you are currently in over your head with debt and need a financial fresh start please contact me so we can discuss your options. You can email me at email@example.com, call me at 864-233-4566, or set up a consultation on our free consultation page.