IS BANKRUPTCY MY ONLY OPTION TO ELIMINATE DEBT?
Choosing an option to manage and gain relief from debt, including potential
bankruptcy, is never easy. After all, no one wants to file bankruptcy if they can avoid doing so. At Kinkade & Associates we are frequently asked by clients if there are any alternatives to filing bankruptcy. Under the right circumstances settling debt may be an option and may allow a family to eliminate debt and yet avoid filing bankruptcy.
Debt Settlement is fairly simple. Your creditors would like for you to pay your debts in full. However, if you can’t pay your debts in full your creditors would generally prefer to have some money rather than nothing. When possible we talk with your creditors on your behalf attempt to negotiate settlement with them. Since we are bankruptcy attorneys, creditors recognize that the vast majority of the people we represent do in fact file bankruptcy. This generally causes creditors to ask us if our clients are interested in settling their debt. If the negotiation is successful your creditor will agree to accept the negotiated sum, less than the full amount of the debt you owe, in exchange for a lump sum payment of less than the full amount owed. Generally, our average settlement is between 45 – 50%. Keep in mind however that this is only an average and actual results vary from person to person depending on the circumstances. At times a higher percentage is required. There are a number of potential advantages to debt settlement:
1. Debt settlement is much more private than a bankruptcy, which is filed in Federal Court and a matter of public record;
2. Debt settlement may be more beneficial for your credit than a bankruptcy, which typically remains on your credit report for 7 to 10 years;
3. If you have a lot of unencumbered property (property with no liens against that property), debt settlement may actually be less expensive in terms of debt repayment than a Chapter 13 bankruptcy; and
4. Debt settlement can be MUCH less expensive than trying to pay off your debts on your own.
The key to debt settlement, and indeed the difference between being able to realistically consider debt settlement as an option and a potential alternative to bankruptcy, is being able to fund settlement of your debt after negotiation with creditors.
There are three common ways of paying for debt settlement:
1. Using an existing liquid asset
2. Borrowing the money
3. Making monthly payments
Using an existing liquid asset to finance debt settlement can work very well. Using a large tax return, cashing in stocks or mutual funds, or simply using existing cash reserves are all excellent ways of financing settlement. Borrowing against retirement accounts may be an option. While cashing in stocks or mutual funds, an IRA or 401k account may also be an option, there can be penalties and tax consequences for taking these funds out prematurely. In addition, you should also keep in mind that IRA and 401k funds are almost always protected from liquidation in bankruptcy. Whether or not to borrow against or drawing out IRA or 401k funds is a very important decision that you must discuss at length with a tax advisor as well as one of our attorneys. DO NOT CONSIDER WITHDRAWING MONEY FROM AN IRA OR 401K WITHOUT DISCUSSING THIS WITH YOUR TAX ADVISOR AND ONE OF OUR ATTORNEYS IN LIGHT OF YOUR ENTIRE SITUATION AS WELL AS CONSIDERATION OF BANKRUPTCY AS ONE OF YOUR OPTIONS.
Borrowing money from family members or obtaining a loan from a financial institution may provide a source of funding to settle your debt. If you decide to obtain a loan from a financial institution, you might want to do so before you stop paying your creditors as your credit score will drop and it may be more difficult to obtain a loan once this occurs.
Finally, there may be an opportunity to work out a longer term payment arrangement with a creditor outside of bankruptcy. Generally, however, this is more difficult to achieve.
SOME ADDITIONAL THOUGHTS REGARDING DEBT SETTLEMENT:
Please remember we cannot settle debts for a client without the client providing to us the money to do so. Through negotiation we will obtain for our clients opportunities to settle the debt placed with us. The decision regarding whether or not to settle any particular debt remains with the client. We may make a recommendation to a client based upon our experience regarding a particular creditor but the client always makes the final decision. If a client rejects a settlement we recommend, it is important to keep in mind that an opportunity to settle that account could come later, but often at a significantly higher percentage, and perhaps only after a lawsuit has been filed on the debt. Please remember that we cannot and do not guarantee that a client will not be sued. In fact, this may happen. If a client is sued we do not represent the client in that court case and will not make any appearance for the client in that case although we will work very hard to negotiate and settle that debt. In addition, there may be important tax consequences for a client if a debt is settled.
We advise clients generally to ignore the temptation to hire an out of state company to assist in settling your debt. Most do not have a good track record. Do your own research before hiring anyone that you do not have the opportunity to meet in person. Decisions regarding your options for debt relief are too important to rely only on a phone call and promises from someone in a cubicle a thousand miles away.
To sum up this article, debt settlement can be a viable alternative to bankruptcy for some clients. We are always pleased to discuss this option with potential clients during a free initial consultation. During your free initial consultation an experienced, knowledgeable and compassionate Kinkade & Associates attorney we will discuss with you whether or not debt settlement may offer you relief from your debt.
Please do not hesitate to contact us for a free initial in-person consultation if you have any questions about whether or not we can assist you in managing and eliminating your family’s debt.
Kinkade & Associates – “Helping families rebuild their financial life.”