There are a few alternatives available to people outside of bankruptcy. These generally involve debt settlement, debt consolidation and debt management plans. Most clients who I have represented over the years were best served by either a Chapter 7 or Chapter 13 Bankruptcy case. The fact that the United States Bankruptcy Court is involved in dealing with all creditors and that they cannot refuse to participate as they often do when it comes to bankruptcy alternatives makes a bankruptcy filing the best option in most cases I analyze.
As discussed above, the most commonly discussed non-bankruptcy alternatives are debt settlement, debt consolidation, and debt management plans.
Often, these terms are used interchangeably. In some cases, that may be justified as, as offered by many “service”-providers, these non-bankruptcy alternatives amount to the same thing: wasting money and time trying to avoid the inevitable. In fact, calling them “bankruptcy alternatives” puts these options on the same footing as bankruptcy, which is highly problematic.
Bankruptcy is a legitimate Federal legal course of action created by statute and bearing severe consequences for creditors who do not comply with the injunctive relief it offers consumers. It does not require the “permission” of your creditors to actually work for you.
Debt management plans, debt consolidation, and debt settlement negotiation offer none of these advantages. In each of these negotiations, you hold none of the cards.
But what are they? Do they offer any advantage for you when you are suffering from unmanageable debt?
As discussed above, over the course of my career, I have helped various clients deal with their creditors outside of bankruptcy, primarily through debt settlement negotiations with creditors. In the right case, good results can be achieved. In my experience over more than 3 decades, I have found that the benefits of filing a petition for debt relief in the United States Bankruptcy Court in which all creditors must abide by the rules and procedures of the Court and cannot refuse to participate is the more attractive option.
Debt Settlement Negotiations
A debt settlement negotiation is just that. It is a process whereby you enter into a conversation with a creditor to pay less than you owe on the balance of the debt.
There is no legal obligation for the creditor to engage in this conversation with you. You have no means of forcing the creditor to allow you to pay what is less than you legally or contractually owe. That’s what bankruptcy does.
In a debt settlement negotiation, the creditor will simply adhere to its internal corporate policy as to whether or not to offer a settlement amount to you.
If it does, it will calculate a settlement amount based upon the cost of suing you to force you to pay. The settlement may also involve a reduction in interest rate, temporary suspension of monthly installment payments (while interest continues to accrue), or other forms of medium-level relief.
What are the advantages?
When it works, you have avoided bankruptcy. For what that’s often worth. In the vast majority of cases, bankruptcy will be a more efficient way to get rid of the debt without tedious back-and-forth negotiating. In bankruptcy, you hold cards. Nearly all of them.
However, there are cases in which a debt settlement may be more advisable than bankruptcy, at least initially. For example, if you are a high net worth individual with valuable assets and one large debt to deal with, negotiating some kind of structured settlement with that lone creditor may be worth trying before electing bankruptcy.
Otherwise, for the Average Joe with average income and the usual assets and a number of different credit card and/or medical debt obligations, bankruptcy is going to slice through the debt problem with extreme efficiency.
The cons of debt settlement, in addition to the need to negotiate a settlement with a creditor not obligated to do so under any provision of your loan contract, include:
- The need to demonstrate some income loss or adverse life circumstances to “convince” the creditor of the need to settle;
- Your inexperience in negotiating legal matters means that you may need to retain an attorney to assist you;
- While missing payments to demonstrate your “hardship,” your credit report is going to be trashed while you negotiate;
- The creditor can refuse to settle.
All of these disadvantages apply even if you hire a non-attorney “debt settlement company” to negotiate on your behalf.
Such companies have no more legal leverage over your creditors than you do. Worse, they take a monthly payment from you, subtract their fees out of it, let the balance pool up in order to, at some point, offer a lump settlement to just 1 of your creditors—while none of your monthly payments are being made.
Talk about bad credit! Many a bankruptcy attorney has found a new, eager client in those who have retained such companies to “help” them.
Debt Consolidation Plans
There are 2 different types of “debt consolidation.”
The legitimate type simply involves your application for and receipt of a loan with favorable terms which you use to pay off or transfer balances from a number of high-interest debt obligations. No lawyer required. No negotiation required. You simply, then, pay off the new, consolidated loan at its contractual rate of interest, etcetera.
The other type of “debt consolidation” is simply the “service” offered by the nefarious debt settlement companies described above but with a different name. It is not a consolidation. It is an erosion of what remains of your credit worthiness and a circular path right back to bankruptcy.
Focusing on the former variety, in which you consolidate your debt into a single obligation yourself, what are the pros and cons?
The advantages of a proper, self-guided debt consolidation include:
- Maintenance and possible improvement of your credit score and history;
- Lack of need to retain an attorney (or anybody else);
- No court oversight of your debt repayment process;
- Possible monthly savings, depending upon the particulars.
The disadvantages include:
- Inability to obtain a line of credit sufficient to actually consolidate all of your debt;
- Inability to obtain a line of credit with favorable interest-rate or other terms;
- Possible need for a co-signor, endangering the financial well-being of a helpful loved one;
- Inability to make timely payments on the new, consolidation loan—leading you right back to bankruptcy.
It is worth also keeping in mind that employment status, income, and life circumstances change on a dime. This is why bankruptcy exists.
Your new, favorable consolidation loan may become immediately unfavorable with a job lay-off or serious medical expense. The long view must be examined when considering a debt consolidation.
Debt Management Plans
A debt management plan is a vehicle for the repayment of your debt managed by a self-avowed consumer credit counseling company. Some such companies are nonprofits certified to legitimately assist consumers; some are financial predators designed to absorb fees and payments from you while doing not much of anything to assist you, just like the “debt settlement” companies described above.
If considering entering into such a deal, research and choose the company you want to work with very carefully!
In either case, you are going to pay a fee for the company’s service. What is that service?
The debt management company will, again, accept a lump monthly payment from you, slice their fees out of it, and then attempt to negotiate better interest rates and other terms from your creditors.
Again, licensed or not, nonprofit or not, these companies have no more leverage over your creditors than you do. Again, your creditors have absolutely zero legal obligation to work with them or agree to any revision of your contractual loan repayment terms.
Maybe it will work out for you, maybe it won’t. Maybe you won’t be simply taken advantage of by an unscrupulous predator. If it does work, you’ll have repaid your debts with a convenient, single, monthly payment with reduced interest or late fee payment and, hopefully, little to no negative credit reporting effect.
- Monthly fees;
- No legal requirement for creditors to buy in;
- Difficult to sort out legitimate consumer assistance from scams;
- Results in no benefit you can’t negotiate on your own for free;
- Will not help you with your mortgage, car payment, or any other secured debt;
- Will take years to actually work.
In fact, debt management doesn’t do anything that Chapter 13 bankruptcy doesn’t do but better, possibly more cheaply, and with no need to negotiate anything with your creditors.
Chapter 13 bankruptcy will also help you save your home from foreclosure while you’re at it, all the with the assistance of a licensed Michigan bankruptcy lawyer who, unlike “debt management companies” can become unlicensed for failing to provide you valued service.
Debt Management Plans & Non-Bankruptcy Alternatives: The Bottom Line
The bottom line is that you can try too hard to “avoid” bankruptcy.
The stigma of bankruptcy is a figment of your imagination. It is a highly effective and legal solution to unmanageable debt that operates under Federal court supervision—and with the teeth of Federal law behind it.
Further, bankruptcy lawyers are required to report and disclose their fees to the Federal Bankruptcy Court and must have those fees approved by a judge.
Lawyers in Michigan are ethically (that means legally!) required to provide you good, non-self-interested advice, furthermore. If you consult a bankruptcy attorney, that attorney is required to tell you if a non-bankruptcy alternative is a better deal for you than bankruptcy.
This is not the case with the predatory unlicensed debt management or debt settlement service providers. Walk in seeking help, walk out with aluminum siding.
Thus, your first visit when seeking out professional assistance to deal with your debt should be to a licensed, reputable Michigan bankruptcy attorney.
Attorney Walter Metzen is a licensed and Board Certified Bankruptcy Expert who has assisted thousands of Metro Detroit area consumers with Chapter 7 and Chapter 13 bankruptcy for over 30 years.
Contact us now to schedule a free, no-obligation consultation.