Everyone wants a solution to their debt problems without bankruptcy. But the truth is, bankruptcy alternatives often suck.
The on-line story of one customer of a debt settlement company particularly sticks with me.
Using the “services” of this company, the poster now has six new judgments of record and two garnishments in process. The debt settlement company, however, has its full fee.
One man I represented went to a debt management company before he found me. The “plan” to get him out of debt was that he send the company 50% of his gross income (that’s before taxes and any other deductions) every month.
I have never seen a client who could keep body and soul together in the Bay Area on 50% of their gross income.
When his “plan” collapsed, he was meeting with a bankruptcy lawyer. The debt management company was counting its fees.
Getting fat on fear
Such stories, and there are lots of them, are emblematic of the profit that debt settlement firms and credit management outfits make on the consumer’s fear of bankruptcy.
Most folks will do anything to avoid bankruptcy, either out of ignorance of how bankruptcy works or a values-driven preference for paying their debts.
Feed that fear and you profit.
Appeal to the inherent desire to do right by creditors, and you get your money before it’s obvious the debt is simply too large to pay off.
When is bankruptcy the best choice
Bankruptcy isn’t right or necessary for everyone, but it would improve the lives of a great many more working families than actually file.
My rules of thumb about when bankruptcy is best:
- The older you are, the more likely you should file
- The smaller your retirement savings, the more likely you should file
- The larger your debts for recent taxes or family support, the more likely you should file
- The greater your debts in general are to your income, the more likely you should file.
Do your get-out-of-debt homework
Everyone considering paying money to an organization promising to get them out of debt ought to see a bankruptcy lawyer before signing up with an alternative service.
A lawyer can tell you about how bankruptcy would work for you and the risks in debt settlement.
Bankruptcy can often wipe out debt with no payment at all to creditors and get you immediate relief without negative tax consequences.
People with high incomes or more assets than they can protect in Chapter 7 can reorganize their debt, frequently at a small fraction of the debt, through Chapter 13.
With a real understanding of the alternatives to bankruptcy, there would be fewer of these sad stories.
More
When you want to pay your creditors in full
Questions to ask a bankruptpy lawyer
Image courtesy of Flickr and Financial Match.
