You are drowning in credit card debt; unable to make even the minimum monthly payments. Take off the rose colored glasses, go through all of your expenses and create a budget so you know whether you should file bankruptcy or negotiate a settlement with your creditors.
Bankruptcy prevents a creditor from collecting a debt1 that came due before you filed bankruptcy, against you personally, forever. If the debt was a ‘secured’ debt, like a mortgage or automobile loan, and you fail to pay the creditor, the creditor can still foreclose or repossess the item.
Settlement means the creditor will accept less money than what you owe to settle the account. Settlement can be a lump sum or monthly payments.
There are tax consequences when you settle. The Creditor will send you a 1099-misc income form for the amount the creditor agreed to forgive, which means you have to include this amount as income. If you were ‘bankrupt’ when you settled, which means the value of your assets was less than the amount you owe your creditors, file a form with your tax return to take away the effect of the 1099. In Bankruptcy, it is presumed you are ‘bankrupt’ and the creditor usually does not file a 1099-misc income, but if a creditor does, notify the IRS that the debt was forgiven in bankruptcy.
If you find your budget has room for a ‘settlement’ expense and you have multiple creditors, prioritize the creditors and target one or two to settle first. Your goal is to prevent a lawsuit. The risk of being sued usually goes up if you have not made a payment in 6 months because that is when many creditors ‘charge-off’ an account. A charge-off means the creditor wrote off your debt as ‘uncollectible’ and reported your debt is a ‘charge-off’ to the credit bureaus. Better to settle your debts before a charge-off occurs. The creditor may hand off your debt to a third party collection agency or sell it to a debt buyer. You are still responsible for your debt.
You may hire a debt settlement company. Make sure you have enough money to pay both the Debt Settlement Company’s fees and the Settlement Amount with your Creditors. Some of Creditors may end up suing you if they don’t like the settlement amount offered by your Debt Settlement Company. The Debt Settlement Company may not be able to stick to your budget. It may be hard to tell if your budget will work because you start paying on the settlement agreements as they are finalized. You may have a creditor who refuses to settle. Some Debt Settlement Companies wait until you have paid their fees before they negotiate, while your credit score continues to go down. It is very important to know the total amount you can afford to pay to settle your debts and still maintain a minimum lifestyle2. You may pay on Settlement Agreements with some of your creditors while other creditors will sue you. You may not be able to settle with all of your creditors for the amount you can afford to pay on Settlements. This is a financial decision, if your goal is to rebuild your credit, the journey may be quicker by declaring Bankruptcy and using your credit wisely after.
If you are sued, and don’t intend to file bankruptcy, don’t ignore the summons and deadlines. Normally you have 30 days to respond. If you fail to respond then the court will allow the creditor to have a default judgment. Once the creditor has a default judgment, collection actions begin. The Judgment creditor may garnish your wages, levy your bank account, subpoena you for a Debtor’s Exam and record a judgment lien with the county recorder.
Tips for responding to a collection lawsuit:
Successful Settler Tips:
You can sue a Debt Collector:
Tip: dealing with your debts is a financial decision. Consult with knowledgeable experts so that you reach your goals as quickly and efficiently as possible. Economist will tell you that bankruptcy relief actually helps the economy so don’t feel guilty, if you need the relief, seek it. It is very difficult to function when you are unable to pay your bills, your wages are garnished, your bank account is emptied by a creditor or your home is sold to pay a debt. If you use your credit wisely after a bankruptcy discharge, your will rebuild your credit so you can save and make a big ticket purchase. Many auto lenders have special programs with reasonable interest rates for low maintenance, better mileage vehicles and a good payment record will help build your credit score.
1Unless the debt is for child support, student loans, traffic tickets, certain taxes, there if fraud involved, or death or injury caused by driving under the influence and a few other exceptions.
2Minimum lifestyle includes paying your rent or mortgage, transportation expenses, food and clothing, utilities, health insurance, and other basics, depending on your situation.