Bankruptcy Alternatives Tips

The Wisdom of Using a Non-Profit Debt Counseling Firm

Understanding what non-profit debt counseling firms are and are not is the key to the wisdom of using them as an alternative to bankruptcy. These firms are not

• Operated by or for the state or federal government to help people;

• Funded by government or private grants to offer this service;

• Necessarily experts at all form of debt. If you are
  facing a pre-foreclosure issue regarding your home, do not seek an unsecured credit related firm;

• Really providing their services for free. While they may not charge you, be aware they are probably generating excellent income.

Many debt/credit counseling firms are

• Non-profit because they filed appropriate documents with the Internal Revenue Service to qualify as a “503C” entity. They still may
  be earning superior income and giving large monthly, quarterly or annual bonuses to their officers and Board members, then legally ending their tax year with no profit.

• Earning large fees from creditors. There is no evidence that legitimate credit counseling firms operate with a “creditor prejudice” but this is something you must at least understand.

• Normally not going to make agreements to
  settle debts at less than full balance payoff for you. Most will attempt to make arrangements for lower payments and/or longer terms, but you will still have to pay off 100% of your outstanding balance.

Remember, this choice is sometimes a wonderful alternative to bankruptcy. However, do not be tempted to agree to a payment plan that provides a short term solution to a long term problem and never make any agreements you know you cannot meet. Do your homework and select only an experienced and reputable firm to work on your behalf.

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Using An Attorney To Negotiate A Debt Reduction Plan

Depending on your situation, using a bankruptcy lawyer to work out a debt reduction or settlement agreement might be the perfect solution or the wrong option. There are two issues that dictate which choice might be best for you:

• What is your debt to income situation? Are you too deeply in debt to offer a simple and reasonable plan of action to your lenders?
  Is your situation so bleak that you cannot propose a resolution in a reasonable time frame? Or is your current situation both temporary and resolvable in the foreseeable future? If so you may be better working out an arrangement directly with your lenders. It is cheaper, faster, simple, and sometimes more effective. On the other hand, if your current situation is complicated, your prospect for future income cloudy, or you face issues that presently are outside of your control, you might be better served by allowing a bankruptcy attorney to
  negotiate an arrangement.

• Should you choose to use legal counsel, your choice of an attorney is critical. Only consider lawyers who have experience and expertise in this area. They have had these discussions with many lenders for many clients of varying income and debt situations. They have a professional “feel” for the best terms your lenders are willing to offer. Any thoughts of using your brother-in-law, who is a real estate attorney, or your golf buddy, who is a criminal lawyer, must be
  dismissed immediately. Using a lawyer unfamiliar with these situations often generates one or both of the following:

1. Your lenders may become annoyed that, without talking to them openly about your situation, you retained inexperienced legal counsel to work out a deal in your favor; or
2. Your lawyer, inexperienced in these matters, may not make the best arrangement you could have obtained from your lenders.

Also, always remember that, unless your brother-in-law is also an experienced bankruptcy attorney, you will incur a substantial cost should you choose to use a lawyer to negotiate your prospective
agreements. Certainly there are situations where the cost is minimal compared to the severity of your situation and the level of the debt arrangement that might be made. But if you are simply over extended for the short term, desire some immediate relief and see your debt-to-income situation improving in the near future, you may incur legal costs that you will regret later.

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Debt Reduction And Debt Consolidation Firms

Is using a debt reduction or debt consolidation firm a good idea? Possibly yes and possibly no. There are two key issues to be considered.

First, how comfortable are you in dealing with your bank or credit card company? Negotiating with lenders, while fairly straightforward in most situations, can be an intimidating experience for many people who lack the confidence to deal with them. Second, should you prefer to deal with a debt relief company, you must be sure they are reputable, experienced and, most important, effective. If you feel reasonably comfortable talking to your lender(s), you should probably attempt to negotiate your own arrangements.

You are the person with the most to gain or lose in this situation. Lenders are aware that you are intimately involved and may (the operative word is “may”) respond more positively than if they are dealing with a professional firm, whose goal is really to reduce the lender's income. Conversely, if you are uncomfortable or very inexperienced in speaking with lenders, you might be better served by letting a professional attempt to restructure your debt. These people have expertise negotiating with a wide variety of lenders in many different situations. They may have a better chance of getting approval for reduced payment terms or advantageous settlement terms than you might have on your own.

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Mortgage Lenders Offer Alternatives to Bankruptcy

For a homeowner who has fallen behind on their mortgage, they may think the only alternative to foreclosure is bankruptcy. However, banks have no real appetite to foreclose on a property due in large part to the time and expense that is involved in the process. Borrowers may seek remedies through the bankruptcy court as a way of forestalling bankruptcy but in reality, this is not their only option and in many cases, may not be their best option.

There may be opportunities for borrowers to work with their lender to avoid foreclosure without filing bankruptcy. Some of these options include:

Deed in Lieu - Some lenders will agree to accept the deed in lieu of foreclosure allowing the homeowner to avoid bankruptcy. Before accepting this option, it is important to negotiate with the lender how this will be reported on your credit report.

Forbearance - Borrowers may be able to negotiate with their lender for a forbearance agreement which would allow them to reduce or eliminate mortgage payments for a specific period of time. Generally, if these agreements are accepted, they would be for 90 days or less.

Repayment options - Lenders may be willing to add your late payments to your existing payments until you are caught up. This option is typically best when a homeowner has fallen behind due to being laid off and have returned to work.

Short sale - For a homeowner, a short sale may be a good alternative to bankruptcy. This option is used when the value of the home exceeds the outstanding mortgage amount. The mortgage lender does have to agree to accept the sale price before the transaction may be complete.

These are a few of the alternatives to bankruptcy that can help a homeowner who is facing foreclosure. Each option has advantages and disadvantages. Keep in mind there are also programs offered through lenders including programs that may be offered by the government at various times to help homeowners who are facing foreclosure.

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Credit Card Companies' Settlements

Contrary to much of their advertising, banks and credit card companies are not your friends. But, if they believe that accepting an arrangement calling for less than regular scheduled payments or approving a settlement that gives them only 50% of the balance due is in their benefit, they will often accept your proposal. If they believe you are a candidate for a Chapter 7 bankruptcy, in which they would probably receive nothing, they may become very interested in hearing your plan for lower payments or a debt settlement as an alternative to bankruptcy. This is why it is so important to have a plan that appears to help the lender just as much as it helps you.

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Bankruptcy Alternatives If You Do Not Own a Home

You have two basic options. Both should be initiated by you, not by your credit card companies. The first possibility is a debt consolidation plan. If you have four credit cards with a total balance of $22,000, you could arrange financing through another source for one loan, at better terms than your current cards provide (lower interest rate, longer payback term, etc.) Instead of being required to make ever-increasing minimum payments to four lenders, you now have only one monthly obligation that will most certainly be less than the amount you now must send every month.

Caution: This option is only available if your credit score has not declined to a level that prohibits new borrowing. If you wish to use this option, do not wait until your situation is bordering on disaster.

The second potential solution is a debt settlement. This option requires you and your credit card companies to “settle” on a percentage of your total debt that you will pay off. In return, the lenders will consider your debt “paid for less than the total amount.” Historically, credit card companies have been willing to settle for 30-50% of your total current outstanding balance. You must be aware, however, that some lenders will hold firm at a level in the 75-80% of total balance, while some may even consider a settlement in the 20-30% range. Once again, this option also assumes you have access to sufficient liquid funds to fulfill your offer in a short period of time, usually less than 10 days.

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An Alternative to Bankruptcy If You Own a Home

Try to set up a “debt workout” plan if your bank or mortgage company is agreeable. You might want to make it your goal to “convince” them to become agreeable to a workout plan. This is always preferable to a declaration of bankruptcy. Think about your plan first! Before you contact your mortgage lender, have an idea in mind that is reasonable – to you and to them – and be ready to explain both your situation and why they should consider your proposal. Have a proposal ready that explains how much of the scheduled mortgage payment you can make on a monthly basis, how long you think you need to stay at this level, and what you are planning to do to “fix” your current default situation in the future. If they accept and you avoid declaring bankruptcy, you, your family and your mortgage lender have a win-win situation.

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Alternatives to Bankruptcy

If your financial troubles are only temporary, get in touch with your creditors and try to renegotiate payments until such time as your financial situation improves. The creditor may be willing to accept a smaller total amount to settle the outstanding debt.

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