Credit Repair, Debt Settlement, and Bankruptcy: part 1.
July 5, 2007
Bankruptcy is a difficult process under the new law (The Bankruptcy Reform and Abuse Prevention Act of 2005). Individuals and families deemed to make too much money are forced away from a clean-cut Chapter 7 filing and into a cumbersome Chapter 13 repayment plan. Those with the means to repay their debts should do so; I am not disputing that. But the payment amount required under the Chapter 13 framework uses an artificially high income figure to determine just what monthly payment debtors are required to make. The law looks at a wage earners gross income in determining how much “disposable” income there is, not his or her net income. It is no wonder that so many cases are dismissed for failure to make payments.
For those able to qualify for a Chapter 7 case, there is relief in sight. Do not wait until your income goes up or a family member gives you money to survive. Find a good lawyer and file. For those contemplating Chapter 13, look elsewhere first.
Where to look? Debt settlement versus debt consolidation.
The Gold Standard.
Debt settlement involves direct negations between your lawyer and your creditors to arrive at a lump sum payment amount. This option avoids the bankruptcy completely and is far less damaging to your credit. The catch? You have to have at least half of your outstanding debt available for settlement. Why use a lawyer? Because an attorney tracks the paperwork and makes sure the settlement is honored. The last thing you want is to settle a debt on your own and have the creditor come back a year later claiming you still have a balance owed.
Other People’s Money.
Debt consolidation is typically not a great option. In a consolidation, you end up repaying 100% of your outstanding debt, interest on the debt, and the consolidation company’s fee! The worst part is that the consolidation company takes your money at the beginning of the month, invests it on its own to make a spread, and then pays your debt at the end of the month—late. This means that the entire time you are in the consolidation, your credit is being further damaged. A better option (but still not the best, in my opinion) is a Chapter 13 bankruptcy case. Sometimes those who got hooked into using a consolidator will pay the company for months or years only to be sued anyway, by their creditors. At least in a Chapter 13, you have the protection of Federal Bankruptcy Laws to keep your creditors from having this option.
How do you come up with the money to settle your debt? Borrow the money from a friend or family member who will allow you to repay it at little to no interest. If you can make that happen, you are golden. You don’t have to come up with 50% of your total debt, just 50% of the account you wish to settle. So, if you have a few large accounts, pay them off first. Then tackle the little ones.
Future Credit and Credit Repair.
This process is complicated and fraught with misinformation. The bottom line: anyone can get back to a good credit score. Whether you have been through a bankruptcy, debt settlement, or just have a low credit score, credit rehabilitation should be considered. Anyone with sub-optimal credit should work to bring up his or her score. Financial health is just like physical heath. If it is ignored, it will cause problems later. Good financial health starts with a good credit score. Don’t ignore it.
