Best and Worst Debt Relief Moves (Part 3)

What is bankruptcy?

-Bankruptcy is a legal declaration of the inability of an individual or organization to pay its creditors.

-Bankruptcy is a federal court proceeding in which a consumer may obtain protection from the creditors. There are two general types of bankruptcy: voluntary bankruptcy or liquidation bankruptcy (Chapter 7) and involuntary or reorganization bankruptcy (Chapter 13).

A voluntary bankruptcy is initiated when a consumer files a petition in court, while in an involuntary bankruptcy it’s the creditor that forces the consumer into filing.

How does a bankruptcy start?

Under the Bankruptcy Abuse Prevention and Consumer Protection Act or BAPCPA, which amended the U.S. Bankruptcy Code, in October 17, 2005, the consumer must first undergo a mandatory credit counseling course (under a court approved credit counseling entity) before filing bankruptcy.

–>Upon completion and if  it was decided that bankruptcy is the best and only solution for the consumer’s debt situation, he/she fills out a form, which is a request to the court to make his/her declaration of bankruptcy legal.

–>With the filing there is a fee to be paid to the courts.

What is mandatory credit counseling?

The mandatory counseling makes sure that the consumer knows that he/she has options other than bankruptcy.

The credit counseling agency must be:

–>Approved by the U.S. Trustee’s office.

–>Completed within 180 days before filing bankruptcy.

This pre-bankruptcy counseling session should include:

–>An evaluation of the consumer’s financial situation

–>A discussion of the alternatives to bankruptcy.

–>A 2-hour course on personal financial management (budget counseling).

 

The consumer at the end of the program must have:

–>Counseling Completion Certificate  (pre-filing)

–>Debtor Education Completion Certificate (post-filing).

What is the consequence of failure to obtain those certificates?

–>If the consumer is unable to complete the course and failed to obtain a Debtor Education Completion Certificate within the required deadline, the case may be dismissed by the court and the bankruptcy will not be discharged.

 

Is it possible to be excused from credit counseling?

–>The court excuses a consumer that is mentally incapacitated or in a military combat zone.

–>Even if an appropriate agency is not available in the consumer’s district and/or the consumer has physical disability that prevents him/her to travel, he/she may not be excused from class, as it is also available by phone or online.  If the consumer prefers to not travel and instead take the last two options, they must first clear it with the Trustee.

–>Another way to avoid attendance is if the consumer can prove to the court that they must file for bankruptcy immediately: to stop an urgent move by the creditor, like wage garnishment and/or the consumer was not able to obtain counseling within five days after they’ve requested for it. The consumer has 30 days to prove the immediacy to the court and 15 more days if they are granted an extension.

What is Chapter 13?

It is that chapter that allows the consumer to pay back all or at least a part of his/her debts as directed by the Bankruptcy Court.

A consumer filing Chapter 13 must be aware of the impact of bankruptcy to their credit report.  That it stays on for 10 years after the debts have been discharged and that it may also cause higher interest rates on future loans. Not only that, Chapter 13 Bankruptcy relies on the consumer’s income, which the repayment plan will own for three to five years, so the consumer has to make sure that it is the only option left for them and that they have really exhausted all avenues to debt relief.

Under Chapter 13 bankruptcy, the consumer deals with the court appointed trustee. The trustee will oversee the consumer’s financial affairs and payments, as well as its distribution to the creditors.

What happens after the bankruptcy is discharged?

Once the consumer completes the three to five year repayment plan, has remained current on their income tax returns, child support, alimony payment, and has obtained the mandatory budget management course, the remaining unpaid balance on the debts that qualify for discharge are going to be wiped out. The consumer is no longer responsible for the discharged debts.

What is Chapter 7?

1.      Chapter 7 bankruptcy (which is sometimes called a straight bankruptcy) is a liquidation proceeding, in which a consumer turns their non-exempt properties to the bankruptcy trustee, who would then distribute the proceeds of the liquidation to the creditors. The bankruptcy would be discharged from all dischargeable debts in the span of three to five months.

But because of the amendments in the bankruptcy law in 2005, this bankruptcy chapter is no longer that accessible to consumers. They are instead forced to file Chapter 13 instead of 7, because a Chapter 7 requires for the consumer to pass their state’s income test or Means Test.

2.       Chapter 7 bankruptcy is liquidation proceeding wherein the consumer receives a discharge of debts within four months. The consumer pays the debts out of their non-exempt assets. They relinquish those assets to a trustee (court-appointed official) who then converts them to cash for distribution to the creditors, or the trustee turns the assets over to the creditors.

A Chapter 7 discharge can only happen once every six years and not everyone is eligible for debt relief under it. The eligibility for a Chapter 7 bankruptcy is based on the “means test” or the income based test.

 

 

 

Best and Worst Debt Relief Moves (Part 1)

There are a lot of materials about debt relief out there for people to choose from – especially online, but not all of them are edited or checked for quality or affectivity—unlike published books. But that’s not to say that an effective and sincere advice don’t exist online. People would just have to really dig deeper into their subject, may it be credit counseling, debt settlement, or even bankruptcy. It’s good to have several sources before making a conclusion.

Eliminating huge credit card balances is a big move. It is different from just managing them and paying the minimum. Anybody that’s considering debt elimination, instead of just debt management, feels that they won’t be able to keep up the minimum payment or any payment at all in the future—and so thinks that all balances should go, once and for all.

One of the worst debt relief moves would be to file a bankruptcy, on just unsecured debts, with no legal obligation or attached judgment lawsuit.  The Bankruptcy forum offers consumers what they call, “Automatic Stay” provision, which prohibits all collection activities against the consumer (judgment case, foreclosure, eviction, etc.)—for as long as the case is in court.

Why is bankruptcy one of the worst debt relief moves? Not only is bankruptcy expensive, it is also tedious, and stressful. The amount of paperwork and the meetings alone should be enough for consumers to be discouraged in filing it, because one wrong information or a missed meeting, can and will cause them the whole case. This is especially true for those who are thinking of filing d.i.y. or without an attorney representation. The court would treat the consumer as an expert in bankruptcy (like a bankruptcy lawyer) in the forum and therefore would not accept errors.

Nowadays, that is since the 2005 revision of the bankruptcy laws, consumers are forced to file Chapter 13 bankruptcy or reorganization bankruptcy, rather than Chapter 7 or liquidation bankruptcy. For consumers to be allowed in a Chapter 7 bankruptcy, the state’s income test (Means Test) must first be passed. A Chapter 7 bankruptcy stays on the credit report for 10 years and a Chapter 13, for 7 years. Both chapters can stay on public records for 20 years.  Not only is a bankruptcy bad on the credit report, a consumer usually recovers from a bankruptcy, only after 2 years (more or less). This is not to say that consumers should not file bankruptcy, not at all, only that a bankruptcy is more effective in financial situations other than elimination of simple unsecured debts.

For an unsecured and secured debt combination, it’s still also possible to not file bankruptcy, but instead take out a loan. But consumers with a very bad credit status are not advised to take out a loan because of the high interest rates attached to them. But if it can’t be helped, taking out a loan is still better than a bankruptcy.

For unsecured debts, there are debt consolidation programs available, depending on the total balance and account status.

Is It Possible To Live Without Credit Cards?

There are a lot of articles online talking about the possibilities of living in cash or without credit cards, all because of growing number of people who are deep in credit card debt, and can’t seem to get out of it. It seems like dealing in cash or debit cards is much more ideals nowadays, when unemployment rate is highest since 1994, and the number of bankruptcy filings is also at its highest.

 

What credit cards give people is a sense of security, which is a false kind of security, for the simple fact that one is spending money that one doesn’t have. Consumers develop an entitled habit which usually results in a financial disaster—people wake up one day, deep in credit card debt.

 

So is it really possible to live without credit cards?

According to the Fair Isaac Corp., the makers of the FICO credit scoring model, there are about 20-25 million U.S. consumers that don’t have any credit. There’s also 30-35 million that have very little credit history. That means that one in five consumers don’t have credit card access.

And according to the Federal Reserve Board Survey of Consumer Finances (2004), one in four Americans actually live without credit cards; this noncredit card holders are further grouped into those who are unable or can’t obtain credit cards and those who chose not to obtain them.

But some would argue that it’s impossible to exist without at least two credit cards. One should be kept for purchases (the primary card) and one for safety, just in case the first card is denied and the latter, is to be kept at zero balance, to eliminate the overspending issue. That seems to be the case though, in the average American home, according to the Center for Media Research. Their study says that 51% of the U.S. population has two or more credit cards.

 

Another reason to have a credit card is to establish a payment history for the credit rating. This is important for those who are job hunting, apartment hunting, or those who are planning on obtaining a major loan in the future.

 

So is it possible to live without credit cards?

The simple answer is yes but it would depend on the carrier’s lifestyle. Some people can’t really afford to not to have credit cards and then there are some that can.

 

Consumers that have suffered through a bankruptcy or a debt relief program might answer definitively. Going through a financial crisis that forces you to seek outside help, whose program costs money and time, can be traumatizing.

 

What is bankruptcy and what is a debt relief program?

 

A bankruptcy is a government-sponsored debt relief program that has several chapters. For private consumer debts, the choices are Chapter 13 and Chapter 7. After the bankruptcy laws revision in 2005, many consumers file Chapter 13 more than Chapter 7, because a Chapter 7 bankruptcy requires the petitioner to pass a Means Test (state income test).

 

A Chapter 13 bankruptcy stays on the credit report for 7 years and a Chapter 7 stays on the report for 10. The credit recovery period from a bankruptcy is about 2 years. Any bankruptcy has a devastating effect on the credit and life itself, that’s why financial experts advise that bankruptcy, be the very last option for consumers in serious debt trouble.

A non-government debt relief program can either be debt settlement/debt consolidation or credit counseling/Debt Management Plan.

Debt settlement requires consumers to have a total debt amount of $10,000/past due accounts to qualify for the program. The program negotiates the balance down to more or less half of the original amount.This October 2010, debt settlement companies are no longer allowed to ask for upfront fees, which make it the most ideal debt relief program for consumers who are desperate to eliminate their credit card debt, in less than three years. Debt settlement companies charge 15% of the total debt amount spread over 18 months or 20-25% of the settlement amount.

The other debt relief program is credit counseling. It runs for 3-5 years and asks for $25/month. Credit counseling or Debt Management Plan negotiates the interest rates to help the consumer pay down the principal amount of debt.

Failed debt settlement, what to do?

Consumers enroll in a debt settlement program armed with different reasons. There really is not one formula that would work for everybody. If the consumer’s financial situation has complications, like a legal action against them from the creditors, then their chances for a debt settlement are slim to begin with.  The debt settlement company, after having done what it can to negotiate the debt, sometimes would advice the consumer to just file for bankruptcy, instead.

A consumer that has been served a notice for a judgment hearing might be best filing bankruptcy, to avail of the Automatic Stay Provision, as it halts all collection activities.

But that’s for a complicated debt settlement case. For a typical or a regular debt settlement case:  meaning, a consumer having a total of $10,000 or more– worth of credit card debt,  past due accounts, and a sufficient savings, graduation from debt is inevitable in less than three years time.

An ideal debt settlement case is, all of those mentioned above, plus the consumer’s account being with a third party collection agency.

 

Why does the total amount of credit card debt be $10,000? What if it’s $5, 000?

It would not make any sense for the creditor to agree to settle, for less than the full amount, if the amount is small. Remember that debt settlement is about reduction, of the entire balance, to more or less half.  As for what if the amount is lower than $10,000, the consumer can try Debt Management, which requires, aside from a debt amount of $10,000 and below, for a current account status.

 

Why does the accounts have to be past due?

5-6 months after the consumer has stopped all payments from the creditor, that debt would be considered as bad debt, and would be passed on to a third party collection agency (that the creditor probably owns as well)

 

What if there’s no savings?

Part of the debt settlement program is to save. The debt settlement company (especially with the new debt settlement law) enrolls the consumer to a third party financial institution, like Noteworld, to deposit money there to save. The consumer can also just save in their own savings account–but never to the debt settlement company’s account.

It takes months to save up for a sufficient amount to offer the lender though, so it’s more advantageous for the consumer to save up in Noteworld, rather than their own savings account.

Once the consumer has saved enough, the debt negotiator , assigned to them, then calls the lenders to let them know how much you have. The two sides would haggle a while as to how much in percentage or amount is the settlement going to be .

 

Debt settlement with the original creditor

To get the creditor to agree to a debt settlement the consumer must have around 75% of the debt ready to be handed in.

 

Debt settlement with a third party collection agency

You can stall however long it may take, to get the third party collection to agree to settle with you, on the amount that you have saved or you can afford.

 

Can you be sued for a prolonged non-payment?

Of course. The creditors (lenders and collectors) have rights too under the law. So if you don’t pay and you failed to explain your side (especially if you’ve undergone hardship) then the creditor or collection agency would sue you for judgment. A judgment is a lawful means to extract or collect money from the consumer, inside an agreement, via wage garnishment, bank levy, or property lien.

**Some creditor sue the consumers before the charge off period of 5-6 months.

 

And that’s one of the probable reasons behind a failed debt settlement. So, what to do?

Some consumers run to a debt settlement company for help hoping to avoid the trouble of the court. Surprisingly, debt settlement companies have what they call “legal accounts” handled by certain debt negotiators  and/or a company lawyer, to  handle and avoid unnecessary and accidental legal mistakes.

If nothing can be done for the consumer after having exhausted all the debt settlement means–then the consumer can explore taking out a debt consolidation loan, or go straight to the bankruptcy court and file.

Bankruptcy has this privilege called the Automatic Stay Provision. Basically the lawyer files it and the consumer can just renew. The Automatic Stay halts all collection activities during the entirle trial period.

Which Chapter to File, Chapter 7 or Chapter 13 (Part 2)

Chapter 13 is also known as a reorganization bankruptcy in which the consumer pays off all or majority of the debts, through a payment plan approved by the Bankruptcy Court, over a period of three to five years. This type of bankruptcy is for the consumer who has a predictable or fixed income as the repayment plan is drawn around it. The consumer calculates his/her income and reasonable expenses to come up with the disposable income.  Under a Chapter 13, the consumer must pay debts in order of priority.

How much of the income would go to the repayment plan?

All of the consumer’s disposable (base) income for the three to five year period would be used to satisfy the debts.

What is Disposable (base) income?

It consists of whatever amount that is left from the consumer’s:

-Total income (average gross income within the 6 months before filing bankruptcy) MINUS:

-Taxes
-Necessary living expenses (reasonable living expense)
-Mandated financial obligations (if the consumer has dependents: child support, foster care payments, or disability payments).
Simply put: Total Monthly Income minus (reasonable living expenses + financial obligations) = BASE INCOME

What is the state median income?

The state median income varies from state to state and the consumer’s civil status or family size (single earner, 2-person, 3-person, or 4-person earners). Tables and calculations for median income
determination are available at the U.S. Department of Justice website.

Why is it necessary?

Consumers that are filing for Chapter 13 bankruptcy relief are required to complete the Official Bankruptcy Form 22C.

Bankruptcy Form 22C is a Statement of Current Monthly Income and calculations and the consumer must enter the income and expense information on the form and also make calculations using the information entered. Some of the information comes from the consumer but the other information comes from the Census Bureau and the Internal Revenue Service (IRS).

What is the order of priority?

Creditors are paid via the court appointed Trustee in order of priority:

1.Secured debts are paid first to prevent the possibility of a foreclosure or repossession:

-Mortgage and auto loan
-Mortgage arrears
-Non-dischargeable debts:

Tax debts or arrears on domestic support obligations (Child support, spousal support, etc.).

2.Unsecured debts

The unsecured debts are paid based on the court approved plan via a Trustee. The Trustee then distributes payment to the creditors. Once the consumer completes the terms of the Chapter 13 plan, the remainder of unsecured debt is discharged.