Before You File

Nobody wants to file for Bankruptcy.  I completely understand this.  But in some financial situations, Bankruptcy offers the best solution and most powerful relief.

Many people facing Bankruptcy have lost control over their finances and some can't even say with certainty who they owe.  Occasionally, a client will walk in my office with a shoe box, grocery bag, or box stuffed with bills that go back many months or even years.  The situation has gotten so bad that keeping track of their bills no longer matters.  There is just not enough money to pay everyone.

A detailed financial examination begins with a simple accounting.  Your household finances can be broken down into four categories:

• Assets - everything you own and the liquidation value of each item;
• Debts - all of your secured debts (house, car, etc.) and unsecured debts (credit cards, medical bills, etc.)
• Income - your household's monthly income; and
• Expenses - your household monthly expenses.

These categories are also used during the Bankruptcy process to determine your ability to pay creditors.  By listing all of your assets, debts, income and expenses, you will have a clearer picture of your financial situation and whether Bankruptcy is a good option for you and your family.  

ADDING IT UP

Once you add everything up, you can determine which debt relief solution is best for you.  For instance, if you have a steady income and a small amount of debt, you may be able to temporarily decrease your expenses or increase your income with part-time work to pay off your debt.  If you have a large amount of assets, you may be able to sell your property to pay your creditors.  If you have a large amount of debt, few assets, and not enough income, Bankruptcy may be the best option for you.  Be honest with your assessment.  If you truly cannot catch up, then you need to acknowledge this problem.

After properly analyzing your financial situation, you need to form a plan of action.  Before considering Bankruptcy, there are 2 options to explore: (1) Do Nothing and See What Happens; and (2) Negotiating with Your Creditors.

DO NOTHING AND SEE WHAT HAPPENS

Doing nothing is the most common response when a person is overwhelmed with debt and can't keep up.  Doing nothing is a natural reaction to an inability to pay.  If you can't pay, you can't pay - right?  Doing nothing may also be used in conjunction with rationalizing and making a promise to deal with the situation in the future (i.e., "I will catch up my bills with my bonus/tax refund/next paycheck.").

The "Do Nothing" approach may be common, but it is also is the worst decision.  Ignoring your debt will lead to more problems and headaches, including creditor harassment, collection notices, lawsuits, judgments, and wage garnishment.  Creditors may also put liens on your property, making it difficult to sell those items in the future.

NEGOTIATING WITH YOUR CREDITORS

The other non-bankruptcy approach is "Negotiation."  This solution goes by many different names (e.g., credit counseling, debt settlement, debt mediation, etc.), but the process is the same: the Debtor asks the creditor for more favorable terms in exchange for making some type of payment.

The benefits of Negotiation can be considerable and the results can depend on the stage of the debt and the parties involved.  There are five stages that your debt may go through: (1) late payment; (2) default; (3) collection; (4) bad debt; and (5) litigation.

Late Payment Stage -

If you are keeping up with a debt, but are struggling due to an unforeseen expense or problem, Negotiation can be very easy.  By contacting the credit card company early, before any missed payments, you can sometimes negotiate a deferment, where the creditor allows you to wait a few months before paying again.  For some people, this short deferment is enough time to get caught up and remain current.  This option helps avoid an unnecessary default, which can result in costly late fees and a higher, default interest rate.

Default Stage -

The credit card company is less willing to negotiate after you have missed several payments.  After default, the credit card company may "re-age" the account and restore the original terms, but usually only after a substantial payment and proof of hardship.  In some extreme cases, they may cancel the late fees and other penalties.  This re-aging generally does not repair the damage to your credit report, but it does bring the account current.  Generally, in this default stage, the credit card company will try to set up a monthly payment arrangement to bring the account current and restore charging privileges.

Collection Stage -

If you significantly behind, the credit card company may send your account to collections.  At this stage, the creditor has washed its hands of the debt.  The collection agency is interested in collecting as much as it can, as fast as it can.  The whole debt is now due and accelerated.  The collection company will typically request monthly payments (which continue to incur interest at the default rate) that will pay the debt in 18 months or less, or satisfaction of the debt with one or more lump sum payments.  If you can pay all at once, the collection agency may reduce the debt to 80-90% of the deficient amount.  In some cases, a credit counseling program may be able to negotiate monthly payments at more favorable terms. 

A word of caution regarding credit counseling programs: these programs may claim to be not-for-profit, but most of them are funded and subsidized directly by the credit card industry.  When a Debtor participates in a monthly payment program, the Debtor pays a small fee to the credit counseling program, and the credit card company gives a "kick back" to the program. Additionally, some credit counseling programs will establish a program to re-age the accounts after a certain time, others will not.  Re-aging the account brings the account current so your payments are credited as timely (which helps you rebuild your credit report and score).  Otherwise the collection agency will continue to record negative items on your credit report each month.  Finally, be aware that if you are unable to complete the credit counseling program, all of the "forgiven" interest and penalties will be reinstated to your accounts.

Bad Debt Stage -

After the collection stage, your account will be listed as "bad debt" with the credit bureaus.  In this stage, your debt is considered uncollectible, and the creditor will take a tax credit for the loss.  The debt is sold (and perhaps re-sold many times) to a debt company for pennies on the dollar.  Unfortunately, even though your original debt may have been low, you are legally obligated to the debt company for the entire debt, including all the penalties, interest, legal fees, etc.

In this stage, your last Negotiation option before Bankruptcy is debt settlement.  Unfortunately, many debt settlement companies are notorious for defrauding consumers.  The basic premise of the debt settlement company is to negotiate a lump-sum payment.  Often this is accomplished through monthly payments to the debt settlement company "on account" until there are sufficient funds to negotiate a settlement amount (generally between 30-50% of the present amount owed).  Licensed attorneys will sometimes negotiate settlements at better terms (20-40%), but the fee is greater.

Debt settlement is a tricky business and can take many months.  The basic tactic is to wear down the debt company until they figure "something is better than nothing" and accept a pennies-on-the-dollar settlement from the Debtor.  During the settlement negotiation you may still receive harassing calls, and you may be sued.  Also, after the debt settles, you may receive an IRS Form 1099 to pay taxes on the "forgiven" debt.  The results of a debt settlement process are not always that great.  Your debt goes away, but you are left with headaches, ruined credit, and an unwanted tax debt. 

Litigation Stage -

The final stage of a deficient debt is litigation.  It is extremely difficult to negotiate any payment terms at this stage since a lawsuit has already been filed and lawyers are involved.  Once a judgment has been rendered against you, the creditor's attorney can seize and liquidate your property, place liens on your homestead and vehicles, and garnish your wages.

LEARN MORE ABOUT YOUR OPTIONS TODAY

Defaulting on your debts can have devastating effects on your life.  In some cases, you can work with your creditors to resolve the debt and avoid a Bankruptcy.  However, if your debt is considered "bad debt" or a lawsuit has been filed to collect the deficiency, it may be necessary to file for Bankruptcy and gain a fresh start.  To learn more about your options and rights, please call the Law Office of Nicholas R. Westbrook at (713) 893-6204.  I am an  experienced Houston Bankruptcy Lawyer who can assist you during this difficult time.  You can also contact my office through  Email  or the Free Case Evaluation.  The road to financial freedom starts here.