I often get asked by prospective clients if bankruptcy is the only option available to deal with their debt problems. The truth is, bankruptcy is not the only option, and several alternatives are available for avoiding bankruptcy. Unfortunately, by the time most people decide to go see a lawyer, bankruptcy is the only cost-effective option left. For those who would like to deal with their debt without resorting to bankruptcy, here are the 4 steps to take:
Don’t procrastinate. This may be the simplest step, but in practice turns out to be the most difficult to follow. It is also the most critical one. If you are going to have a reasonable chance of resolving your debt issues, you will want to be proactive. The reason is simple—the lower the debt, the easier it is to deal with it. Delay results in increases to your debt through interest, fees, and other charges, and can often lead to the doubling or tripling of the original debt. Delay can also have a snowball effect, causing you to incur more debt as you are trying to deal with the existing debt. So, to maximize your chances or getting out of debt, begin to address it as soon as possible by following the remaining three steps below.
Evaluate your financial situation. The second step is to evaluate your financial situation and determine the reasons that forced you to get into debt. For example, is the debt the result of a medical emergency that is not expected to recur? Or is the debt the result of loss of income? If there has been a loss of income, what is the likelihood of regaining that income? What is the expected timetable? In conducting this evaluation, it is important to be completely honest with yourself, and not engage in wishful thinking. If, for example, there has been a loss of income, but you have not been able to find any open positions at the same income level, then it would not be reasonable to assume that you will regain your income in three months. This of course does not mean that you will not in fact find a similarly-paying job in the next three months. But for purposes of planning a debt resolution strategy, it is best to be very conservative in your expectations.
The purpose of this step is two-fold: you need to know whether your debt is fixed, or whether you will continue to incur new debt; you also want to know how much you can afford to pay toward your debt when it comes time to settle it.
Analyze your debt structure. What kind of debt do you have? Is it a mortgage on which you are behind? A car loan? Income taxes? Credit cards? Medical bills? There are different ways to deal with each kind of debt, and some debts must take priority over others. As a rule of thumb, you want to deal with the mortgages on your home first. Next on your list of priorities should be taxes. After that, other secured debt, like car loans (you can read about the differences between secured and unsecured debt by clicking here). And finally, unsecured debt like credit cards, medical bills, and personal loans. (Read our article on financial planning for more information).
Debt resolution. The final step is to resolve your debt. Resolution of a debt can take one of several different forms.
- Mortgages—if you are behind on a mortgage and not able to catch up, you will most likely want to seek a mortgage modification. If you have a residential mortgage, there are several different programs and resources available to help you. You can find links to a few of such resources on our Resources Page under “Foreclosure Assistance.” In addition, there are several community counseling agencies that can assist people with applying for mortgage modifications (the list of many of these agencies is available through the HUD website). For other types of mortgages, a modification can be requested directly through the lender. Of course, since the lender has to agree to a modification, there is no guarantee that your request will be granted.
- Taxes—there are several different programs for settling or negotiating tax debt, such as the IRS Offer in Compromise program. Because of the complexity of tax matters in general, it is best to consult a professional regarding your best options for settling tax debt.
- Credit cards and other unsecured debt—when it comes to unsecured debt, there are two basic options: disputing/litigating the debt, and settling.
- The dispute/litigation route is useful if you have a legal basis for contesting liability. For example, it is not uncommon for collection agencies to try to recover debt after the statute of limitations period has expired. In such cases, disputing liability based on the statute of limitations may be the best and most cost-effective option. Another fairly common occurrence is where a debt is purchased by a collection company, but the collection company lacks adequate documentation of the debt, and cannot prove the liability in court. In such cases, disputing the debt may also be the best option.
- The settlement route can be utilized in all cases. In essence, settlement requires negotiation with the creditor, in an attempt to get the creditor to agree to accept less than what the creditor is owed. Several points should be kept in mind when negotiating a settlement. First, if you are current on your minimum payments on an unsecured debt, it is a lot less likely that a creditor will agree to reduce the amount owed—generally you’ll need to be a few months behind before the creditor will negotiate with you. Second, it is best to conduct the settlement discussions before the creditor retains an attorney or files a lawsuit—the less the creditor has to spend on attorney fees and court costs, the more likely it is that you can get a better settlement. Third, many creditors will require you to provide evidence of financial hardship by disclosing information on your assets and finances—if you in fact have assets sufficient to pay the debt, the creditor may reject any settlement proposal and go after the assets that you disclosed.
Ultimately, if you are dealing with debt and are trying to decide whether to pursue a non-bankruptcy option or to file for bankruptcy, ask yourself the following: which approach is most cost-effective? The “costs” include actual monetary costs, but also indirect costs (e.g. the length of time it will take to rebuild your credit history). If you decide that a non-bankruptcy resolution is the best option for you, know that it can be done. Just make sure to be proactive in your approach, prioritize your debts, and get professional assistance if you need it.
The above is provided for general informational purposes only. It is not intended to and does not constitute legal advice, and does not create an attorney-client relationship. If you need legal advice for your specific situation, you should contact a qualified attorney in your area.