Archive for the ‘Bankruptcy Alternatives’ Category

Anyone considering bankruptcy has seen the adds…”drastically reduce your credit card payments…don’t file bankruptcy, Call us first.” Many of these adds promise to reduce your credit card payments and freeze your interest rates.  However, the question is….do they work. In a previous post, I wrote about what a fraud debt consolidation companies are.; but what about debt management, or “debt negotiation”?  How do debt management companies rate to bankruptcy?

1. Guaranteed Success: Bankruptcy wins here. In debt settlement, your creditors do not have to participate in your debt negotiation program. However, in Bankruptcy your creditors don’t have an option. In a Chapter 7 bankruptcy your unsecured debts are discharged (they go away) and in a Chapter 13 Bankruptcy, the court sets up a repayment schedule that is based on your available monthly disposable income.

2. Credit report: this could go either way. Bankruptcy stays on your credit report for at least 10 years. However, most people who file bankruptcy have a better credit score within a year after filing. Debt settlement does not do much better.  Even if you repay your creditor, your participation in the program is reported to the credit reporting agencies;  not to mention that it will generally take longer to repay your debt.  If a creditor has already sued you, this will also stay on your credit report for 10 years.

3. Taxes: This is a big one. Did you know that if you settle your debts with your creditors for less than the full value that your creditor will issue you a 1099 for the amount that the creditor wrote off…and it is considered income for you. So assume that you owe a creditor $10,000 and settle the debt for $5,000. At the end of the year, the $4,000 that was written of, is considered income; so you have to pay taxes on that $4,000. The IRS considers this a forgiveness of debt and it is taxable income. This is not the case in Bankruptcy; once your debt is discharged, there is no tax consequence.

4. Finality: Consider this; most people who try to settle their debts through one of those debt settlement companies ends up filing bankruptcy anyway; usually after they have paid thousands of dollars in fees to the settlement company; only to never have it paid to their creditors. Even if you stick to the program, it could take as much as 3 years before some of your debts are settled. If you file bankruptcy; you receive your discharge within three months of filing (for a chapter 7).

Every situation is different; bankruptcy is not for everyone. As I have always said, if you are in a lot of debt and you are considering bankruptcy, the first step is to talk to a Massachusetts bankruptcy lawyer.

Today I read an interesting article by a self proclaimed “financial expert” who has made himself rich by selling books and advice to people who are in debt. I will avoid using his name; but truth is there are quite a few “experts” like him on the internet; just look for the paid ads in Google that say “Avoid Bankruptcy”, “Bankruptcy Alternatives”. In his article, he states that even if he sees a situation where there is “no way out” that he would try to talk the person out of filing bankruptcy. His article was rattled with lies; such as “bankruptcy stays with you forever” and half truths such comparing bankruptcy to the death of a loved one. However, as I read on, one thing became clear; this expert was using a time tested marketing technique called fear. He was attempting to scare people into buying his product…a subscription to his website, or one of his many books.

This gets me to the point of this post: as financial times get tough, there are more and more unscrupulous companies out there that target and take advantage of people who are going through financial troubles…so be careful. Most people that consult with me have been programmed to believe that they should avoid bankruptcy at all cost and they have this huge social stigma against the bankruptcy; to the point that they are on the verge of becoming homeless. It is this “stigma” that has lead to more and more predators appearing on the internet, in the news paper or on the radio. These companies all have a common theme; they claim “reduce your debt by 60% or more” or that can negotiate a lower payment. I recently saw one site that promised to have you “out of debt in 18 months”. If this sounds too good to be true, well it is. Most people who use one of these services end up filing bankruptcy anyway after they have paid thousands of dollars to these companies while nothing is ever paid to their creditors.

Let me explain how most of these companies work. First is the payment reduction method, or debt consolidation. Through this method, the company sends a letter to your creditors asking for lower payments. They also ask that your creditor pay them a certain percentage of the loan, and may have you pay a fee also. You pay the consolidation company and they pay your creditors. Your creditor may participate in this program, but most don’t. This means that you end up paying the consolidation company for a few of your debts and paying your actual creditor for the rest.
The second method usually used by these companies is the debt settlement approach. Under this approach, the company will have you start making payments to them instead of your creditors. They tell you to stop paying your creditors, and some even say that they have already made arrangements with your creditors. These companies first collect their fees (most of the time several thousand dollars), then put the rest in a bank account. They then wait until your creditor defaults you for not making payments then they propose a “lump sum” payment in full that is a fraction of the outstanding debt.

Don’t get me wrong, debt consolidation and debt settlement do work for a relatively few people; I have done them myself for my clients. So my suggestion, before you waste your money on one of these companies, schedule an appointment with a good bankruptcy lawyer, most consultations are free. Ask your attorney questions about alternatives to bankruptcy and if he insists that bankruptcy is your best option, ask him to explain why. If he gets upset or short, or cannot answer your question, then end the consultation and call another attorney. Because the truth is; bankruptcy is not for everyone and a good attorney will tell you so.

If you have applied for a loan modification with your Mortgage Company or servicer, you are not alone. In fact, there are published reports of mortgage lenders and servicers receiving hundreds of thousands of requests for loan modification. However, there are few published success stories about homeowners who have actually been granted a loan modification. It is estimated that since early March, a mere 55,000 trial loan modifications have been granted by mortgage lenders following the launch of President Obama’s foreclosure prevention program. This success rate is low considering the number of homeowners who are currently facing default, foreclosure, or even eviction from their home. Due to the high volume of loan modification requests, loan servicers are currently overwhelmed by the influx of applications. President Obama’s administration launched a foreclosure prevention program and guidelines on March 4, 2009, however, it has taken mortgage companies and servicers months to overhaul their internal systems and train their staffs on processing applications. This period where lenders are ramping up for loan modifications has caused delays and frustration for many homeowners who are looking for a lifeline from their mortgage company.

The “Investors First/Customers Last” Approach

Another barrier to loan modification is the pressure placed on mortgage servicers by their investors. In many instances, hundreds of mortgages are “pooled” or packaged together as a securities and sold to a group on investors. Sometimes there are hundreds of investors in these “pooled” securities. Not only is it difficult to get all the investor’s consent for a loan modification; but, there is no incentive for these investors to grant consent to modify any mortgages that are part of their pool. These investors are not required to, and there is nothing to compel them to consent to any loan modification. Many servicing agreements between investors and mortgage servicers restrict and prohibit the mortgage loan servicers from modifying the material parts of any loan, such as the interest rate, repayment terms, or monthly payments. This results in you, the homeowner, waiting months and months for approval your loan modification that is probably never going to come.

Bankruptcy Court Intervention: A Guaranteed Solution

So, what is a homeowner to do? A Chapter 13 Bankruptcy can help homeowners prevent the foreclosure of their home, and provide a plan for the repayment of all past due mortgage and escrow payments. A Chapter 13 Bankruptcy cannot modify the terms of your first mortgage, and, in many instances, the success of a Chapter 13 case depends on the willingness of the mortgage lender to modify a mortgage and reduce monthly payments. In limited cases, a Chapter 13 bankruptcy can avoid and eventually discharge a second mortgage. This action can be taken immediately in a Chapter 13 case, which can reduce your total monthly mortgage payment by the amount of your second mortgage. This relief applies in limited circumstances and it is important that you consult with an experienced Massachusetts bankruptcy attorney at Grantham Cencarik, P.C. to determine whether you qualify.

The First Step: Call Us – (617)497-7140

In the mean time; if you receive a letter from your lender concerning foreclosure; call us immediately; because the longer you wait, the more likely you are to lose your home. Also avoid talking to anyone who claims that they can save your home without filing bankruptcy, chances are, it is one of the many predators out there who try to steal the equity in your home, or who take money from you. If you are approached by one of these people, tell them you want to have your lawyer review their offer first, then call us for a free consultation.