FAQ #23: Why would I choose bankruptcy over debt consolidation or settlement?

Debt consolidation involves getting one loan to pay off multiple smaller loans. The advantages are that the debts are paid off in full, often at little to no damage to credit, and the new loan may have more favorable terms over the old loan, such as a reduced monthly payment, a larger monthly payment (that will insure the loan is paid off quickly) or a lower interest rate.

Consolidating loans takes the logistical hassle in making sure that multiple loans are paid on time and ensures that the debtor only has to make one payment, and gives the debtor the ability to “shop around” for the best deal. However, since debt consolidation requires a new loan, someone with excessive or past-due debt may not be able to obtain a consolidation loan. Additionally, depending on the debtor’s situation, debt consolidation may not provide enough relief, especially if the borrow cannot afford the payments on the new loan.

Debt settlement is the process of attempting to pay your existing debts for less than you owe. No creditor is required to settle a debt, but for financial and practical purposes many companies will compromise the amount owed. If your creditors agree to accept less than you owe, you must usually make a lump-sum payment, which may be difficult. Also, paying a debt for less than you owe has tax consequences – the “forgiven” portion of the debt is considered to be income by the IRS, and, with certain exceptions, you will be required to pay taxes on that income.

Bankruptcy, on the other hand, ultimately involves the discharge of the obligations, meaning that you are not required to pay them back. Bankruptcy also provides other legal protections that may be beneficial to someone needing financial assistance. For example, the automatic stay in bankruptcy is a useful tool in temporarily stopping foreclosure proceedings brought by your mortgage holder(s), as well as halting collection efforts, collection calls and lawsuits filed by your creditors. Click here for more information on chapter 7 and chapter 13 bankruptcy.

Where's MY Bailout?!

With the economic turmoil that has well entrenched itself in the United States now starting to develop in Europe, and economic experts on both sides of the Atlantic saying something ranging from "we're not out of the woods yet" to "the worst is yet to come", it seems that we all have continued interest (and perhaps suspicion) regarding the concept of the "government bailout".

We all learned that the U.S. Government would be spending billions of dollars bailing out General Motors, Citigroup, Bear Stearns, Bank of America and AIG, and now, there are discussions of the European Union bailing out the entire government of Greece. With the billions (trillions?) of dollars at stake in these government sponsored bailouts, many people have asked, often rhetorically:

"I am overwhelmed with credit card debt; I've been out of work for months; these unexpected medical bills are piling up - I don't know what do do. Now, I'm so far behind, I can't even afford the minimum payments, and I fell behind on my mortgage - I might loose my house. Where's MY bailout?"

Surprisingly, there is a program that, if you qualify, will permit an individual, a business, or a family to seek relief of certain debts, such as credit cards, medical bills, even certain types of civil judgments so that they may be paid off for pennies on the dollar, or, often, discharged entirely. Even more surprisingly, this is not a new program: it is the Bankruptcy laws of the United States.

But wait...BANKRUPTCY? That's not a bailout. It hurts my credit!

That is true. All actions have consequences, and the government bailouts we see in corporations have their own consequences. The public trust in these businesses may be shaken, profits may be hurt, and their corporate credit will suffer. I will not attempt to equate personal bankruptcy with the Emergency Economic Stabilization Act of 2008; my comparison is only an analogy, but I will maintain that if you are in a untenable financial situation, you do have options to protect your self, your assets, and your family. For more information regarding your own personal "bailout", contact Kelsey & Trask, P.C. for an initial bankruptcy consultation. We would be happy to meet with you to discuss your situation and address the benefits and risks of bankruptcy, as well as alternatives to bankruptcy, such as debt settlement.