Debt consolidation for unmanageable finances
Debt comes in many forms. We may have residual student loans, unsecured debt through credit cards or unexpected medical bills, and even larger-ticket payments such as mortgages and auto payments.
Debt is so prevalent in the lives of individuals because it is difficult, if not impossible, to housing, education, and even healthcare, directly out-of-pocket. As such, we take out lines of credit and loans with the intention of paying these large sums back in manageable, monthly installments.
Sometimes however, even our best attempts at managing monthly payments goes astray. We might lose a job, get our hours cut, or experience an illness that suddenly makes it difficult to make monthly payments at the same rate as before.
When this happens, debt can spiral out of control.
As Bankruptcy Attorneys, we have helped people from all walks of life regain financial freedom. Below, we outline some of the most common solutions available to settle your debt to help point you in the right direction.
Debt settlement
The irony about bankruptcy is that for many individuals, they do not have the money to pay the initial fees. When this happens, they often turn to debt settlement as a solution.
Here, so long as you can prove financial hardship (such as a recent loss in work, reduced hours, divorce, etc.) you can hire a debt settlement company to drastically reduce the amount of debt you owe. Sometimes, these companies can work out a compromise which requires you to pay only as little as 10% on your total debt.
If this sounds too good to be true, you’re partially correct.
While debt settlement is a legitimate option of debt management, it’s not as easy as people initially believe.
For one, the process itself can take between 24-48 months once you begin work with a debt settlement agency. When you have over $5,000 in debt to a single creditor, this not only puts you at risk from harassing collectors, but it puts you at risk for a lawsuit. Should your creditor win a judgement against you, this allows them to take more drastic measures such as garnishing your wages.
To take a look back at harassment, this is another downside to debt settlement. Without the protection of an automatic stay (a type of bankruptcy protection discussed later), there is nothing prohibiting your creditors from putting your account into collections. This can become extremely taxing over time, especially when collection calls are coming from a myriad of different networks.
Finally, debt settlements have an extremely low success rate. In fact, it’s as low as 10%. This means that if and when your settlement goes south, you will often be in a worse financial situation than you were before starting. Even on the off chance that your settlement is successful, many individuals do not have the money to pay back their creditors in a lump sum as is required by the settlement process.
These factors taken into account, debt settlement is a risky process that simply does not have a very good outcome and should only be pursued as an ultimate last resort. A far better, and safer, alternative is to file for bankruptcy when possible.
Chapter 7 Bankruptcy
Chapter 7 Bankruptcy is, out of all the common filings, one of the most heavily misunderstood.
Stemming from a lack of information of the process and protections included within Chapter 7, many individuals believe that filing for this form of bankruptcy will automatically strip them of all their belongings. While this can sometimes happen, it is not necessarily as common as people believe.
Chapter 7 is known as a liquidation plan, meaning that your assets are liquidated in order to repay your creditors. However, there are several exemptions to this process which results in individuals being allowed to keep many of their assets and belongings, especially those which are under a certain monetary value. These exemptions include the following:
- Homestead
$145,425 in home equity of you place of residence is qualified for a homestead exemption - Personal Property
There are several divisions of personal property and each has their own exemption amount. Those which are of most concern to bankruptcy filers are the $13,400 household goods exemption, $,1,700 jewelry exemption, and the $4,000 motor vehicle exemption. - Wages
Wages are exempt, but only to a point. The current standard is that either 30 times the minimum federal hourly wage or 75% of your disposable income is exempt. Whichever is greater is the exemption that takes precedence. - Pensions
In this category you will find IRAs, Roth IRAs, private pensions, and tax exempt retirement accounts such as 401(k), 403(b), and profit-sharing.
That being said, Chapter 7 has a few barriers to entry for those who apply.
As Chapter 7 offers extreme debt relief through forgiving large amounts of unsecured debt, you must prove you have a need for this kind of service. As such, individuals will need to pass a means test before filing for Chapter 7 to show they are financially incapable of repaying their debt by other means.
Chapter 13 Bankruptcy
Chapter 13 does not have the same stigma or myths surrounding it as Chapter 7, as this type of bankruptcy mainly serves as a restructuring policy for your existing debt.
Chapter 13 is called a wage earner’s plan as it strives to place individuals on a path to repay the large majority of their debt through stringent budgeting and monthly payments. As such, under Chapter 13 you work with a lawyer to understand your debt and work out a budget that can have you in the clear with creditors within 5 years. This gives many individuals a second chance at saving larger assets, such as their home, which can often be pulled out of foreclosure through filing for Chapter 13.
Exemptions also exist for Chapter 13 and follow the same guidelines as those seen in Chapter 7.
Similarities in Bankruptcy Filings
No matter which bankruptcy proceeding you choose, there are a few universal similarities between the two that are important to take into consideration, both good and bad.
On the positive side, all bankruptcy comes with the protections of an automatic stay. The automatic stay puts a freeze on your creditors, prohibiting them from harassing you, putting you into collections, or garnishing your wages. This stay is in place for the duration of your bankruptcy filing, providing individuals with a meaningful buffer against added expenses during their filing process.
Furthermore, exemptions are given out on an individual basis. This means that if you are married, you can double the amount of the exemptions listed, as both you and your spouse are entitled to a full set.
On the negative side, any form of bankruptcy has a lasting negative impact on your credit history, credit report, and credit score. In the case of Chapter 7, these effects last up to 10 years. In the case of Chapter 13, these effects last anywhere from 5 to 7 years depending on the length of your repayment schedule.
This can have unexpected consequences when it comes to future financing, making it potentially challenging to secure a loan if needed or even rent from certain landlords.
As such, it is important to speak with your lawyer about your financial bandwidth and long-term goals to decide which form for filing will help you reach financial freedom with as little disruption to your daily life as possible.
A Note on Credit Counseling
Sometimes individuals who need help with debt confuse credit counseling with debt settlement. While these both help make debt more manageable, they are not the same type of procedure.
Credit counseling is a service that seeks to reduce interest rates to make your monthly payments more manageable. This is generally limited to credit card debt, especially when the amount you owe is less than $15,000. Unlike debt settlement or bankruptcy, counseling services don’t offer anything by way of debt forgiveness. This means that counseling services might not be enough for those who have more severe debt management needs.
However, unlike the other options discussed in this article, credit counseling offers more to clients than reducing debt. Oftentimes you will work with a credit counselor who can help you plan out a debt management plan that will give you a blueprint for healthy financial habits. This educational aspect can help you plan out your future in a sustainable manner, giving you the tools you need to avoid being underwater in debt in the future.
Finally, when compared to other options, credit counseling has the least damaging impact on your credit report.
Finding an Ohio Bankruptcy Attorney
Talking to an Ohio Bankruptcy Attorney
As a bankruptcy attorney, I have worked with many individuals suffering from unmanageable debt. This has led to practice, training, and personal experience in many of the challenges and solutions faced for people who need help regaining financial control. Need a debt consultation, we are here to help. Reach out by giving us a call at (216) 241 2510 to speak with an attorney about your case. It might help you more than you think.