Chapter 13 Bankruptcy

Debt Consolidation Vs Bankruptcy: Why Filing for Bankruptcy Is Almost Always The Far Better Option

unnamedActual verbiage from a large debt consolidation company’s contract.

At the first sign of serious financial trouble, many people make the mistake of immediately opting to work with a debt settlement or consolidation agency without taking filing for bankruptcy into consideration; or, at the very least talking with an experienced attorney like Haines & Krieger that can walk you through all the pros and cons. In theory, working with a debt consolidation company might make sense and seem like the responsible way to manage debt issues. However, most often these consolidations result in nearly irreparable damage to your credit rating and achieve none of your desired results.

How Do I Pay My Bills?

Debt Consolidation – When you work with a debt consolidation company, you typically give them all of your bills and stop making payments on your bills. They may charge a single monthly fee, keep some of your payment as their fees and save the rest to eventually try and settle some of your debts. As a result, your payments are still considered late and your credit score will suffer.  Moreover, in many instances your creditors will continue collection actions against you, and sue you to collect the debts even if you thought they were being paid off in a debt management/consolidation plan.

On the other hand…

Bankruptcy – Your creditors have virtually no say in whether your bankruptcy is successful. As long as you have complied with your requirements under the bankruptcy code you will be debt free in often very little time through Chapter 7 instead of waiting years and years to be disappointed in a debt consolidation plan. In chapter 13, you will actually repay your creditors what you can afford and after 3-5 years will also be debt free of your dischargeable obligations just like in Chapter 7; and during your 13 the collection ceases and your credit should begin substantially improving. In other words, Bankruptcy is often the most responsible way to manage your debts.

 

Will My Wages Be Garnished?

Debt Consolidation – Often debt consolidation companies will garnish your wages to collect your debt.

Bankruptcy – Collection stops, period!  Your wages cannot be garnished after you file your case and discharge your debt.

Will I Owe Taxes?

Debt Consolidation – Yes, you might owe taxes. Perhaps more importantly, you can owe taxes on the debts that are forgiven when the consolidation company settles your debts for less than you owe. If you settle a $10,000 debt by paying $3,000, then the IRS determines that you have just made $7,000 in debt cancellation and should pay taxes on that $7,000 of income. You will get a 1099-C form as evidence of this income if you settle any debts.  Putting that in perspective, just think about how much extra you may owe the IRS even though you thought you saved money on well-negotiated deal with one of your creditors.  Not only that, but if you create a taxable event, that may often required you to pay all that income tax with your next tax return, which would in turn create for you a significant tax liability that you may not be able to afford.

Bankruptcy – There are no taxes payable on the bankruptcy discharge!  A discharge of your debts through Bankruptcy is not a taxable event.

 

How Will My Credit Score Be Affected?

Debt Consolidation – During the time you work with a debt consolidation company, your credit rating can be continually damaged because your loans are often not being paid in a timely manner. Your debt might be sent to collections, affecting your credit rating and possibly resulting in judgments. Your fresh start may never begin until all your debts are satisfied in full plus (+) 7 years from the date of your delinquency.

Bankruptcy – Filing for bankruptcy allows you to start off with a clean slate and begin rebuilding your credit score almost immediately. While the fact you filed Bankruptcy may appear on your report for seven to ten years, your credit score will often rapidly improve because it will no longer be continually damaged by the consequences of being delinquent month after month while working through many debt consolidation plans.  

 

Will I Be Protected From Harassing Collection Calls?

Debt Consolidation – Your creditors may continue to collect debts from you even after you sign up with a debt consolidation company as long as they comply with the law, such as the Fair Debt Collection Practices Act.  

Bankruptcy – Under bankruptcy laws, you are protected from harassment by collections calls, period!  Creditors who persist in post-bankruptcy collection without permission from the Court violate bankruptcy law.  Often these creditors are punished quite severely.  In fact, the Nevada bankruptcy court awarded our clients sanctions ranging from nominal amounts up to $65,000 for illegal creditor collection after bankruptcy.  While results of creditor violations may vary, the bottom line is bankruptcy law requires the harassment to stop and creditors that break the law can be severely punished.

 

Is Debt Consolidation or Bankruptcy A Scam?

Debt Consolidation – Unfortunately, quite often, debt consolidation and settlement companies scam consumers, as per the FTC Attorney General’s warnings on this.

Bankruptcy – Bankruptcy attorneys, however, must follow tightly wound ethical rules, and can lose their license to practice law if they give bad representation or cheat a client. Debt consolidation companies do not have these ethical rules, and have a history of cheating good people out of money  as can been seen by the above Federal Trade Commission above.

 

How Much Will It Cost?

Debt Consolidation – Often cost a lot more than filing for bankruptcy most of the time and you don’t even get a lawyer usually; with filing for bankruptcy you get us – experienced lawyers. Consolidations mostly front load fees and you are literally paying the consolidation company for months or years before any progress is made in many instances.

Bankruptcy – Filing for bankruptcy with Haines & Krieger results in you getting immediate relief.  In fact, if you repay debt through a chapter 13 Haines & Krieger may charge as little as $100 (plus filing fees and costs) to get your case filed taking most of our fees over time while your debts are being managed in your chapter 13 plan.

 

What’s The Most Responsible Way To Get Out Of Debt?

Our client’s are brave and responsible people, who have sought help and advice on the best way to help them often unforeseen financial downturns.  It may seem like the responsible thing to repay your debt with a consolidation company.  However, that’s almost never the case. Don’t let debt consolidation companies snow you into believing that debt consolidation is a better out than bankruptcy. It almost never is. Indeed, the financial fallout may put you in a far worse position than before you started with a consolidation company.

Debt Consolidation may seem like the responsible choice, but talking to an experienced attorney like us is actually your best option. Indeed, debt consolidators sell consumers on the faulty premise that they are doing the responsible thing by paying creditors through their programs. However, filing for bankruptcy is usually the best option since:

  • You immediately get a fresh start
  • Your credit begins to improve when compared to being in perpetual default for years
  • Your creditors are required to stop collection, garnishments and harassment
  • Your creditors have little to no say in whether your bankruptcy is successful

This provides you with much more certainty than going through the debt settlement company. In addition, you will know what’s involved and what will happen, from start of the bankruptcy process to when you are finally debt free.  We very much look forward to helping you.

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