Bankruptcy Is Just One Option
While Chapter 7 and Chapter 13 bankruptcy often prove to be effective tools in helping individuals deal with financial problems, they are not the only options. My office will help you consider alternatives after meeting and hearing about your situation. Settling a debt doesn't require filing a bankruptcy. But, considering there is often thousands (or tens of thousands) of dollars on the line, it is best to be fully informed about every option and its long-term consequences.
Bankruptcy may be something you don't want to do until you consider all other options. Or, you may not qualify. Each individual situation if different, with its own set of circumstances, problems, and opportunities. The following are just a few alternatives if bankruptcy is not an option for you.
Negotiated settlement payments
If you have been sued by a creditor, it is sometimes possible to contact their law firm and negotiate a monthly payment agreement. My office gets great results negotiating such payments. Creditor law firms know I can file a bankruptcy, which would leave them with nothing. This gives me great leverage when negotiating. Creditors are much more likely to listen and be reasonable when speaking to a bankruptcy attorney than an individual debtor.
There is no guarantee that your creditor will negotiate. However, this is often a good option if you are facing only one lawsuit that is for a not too large amount, or if your income has recently increased. Obviously, you will need to have the extra income necessary to make a payment every month. I'll help you review your budget to see if this is possible.
My office will contact your creditor's law firm and attempt to negotiate a monthly payment. If a monthly payment is agreed upon, I will draw up the agreement, and forward your first payment (you will make all payments thereafter). While you are making your monthly payments, the creditor will agree to not file or pursue a lawsuit. Once the final full payment is made, any lawsuits associated with the debt will be taken off your record.
Negotiated lump sum payments
If you are able to make a lump sum offer as payment towards a lawsuit, once again, my office has had great success in reaching agreements with creditors.
Creditors will often take less than the full amount on a judgment, sometimes much less than the full amount, when negotiating with a bankruptcy attorney.
A lump sum payment is only an option if the money is available immediately, or in the near future. This will be an option when someone else (such as a parent or a friend) is able to help you with the payment. Tax returns or savings can also be used. In rare cases, retirement funds can be used (though it is normally preferable to file a bankruptcy and protect these funds). If funds are available, a lump sum settlement is possible. It is my job to make sure you pay the smallest amount possible when negotiating a debt.
I will fully explain this option to you and discuss if it is wise in your situation. As discussed below, I will explain any tax ramifications for settling a debt (see: Debt Forgiveness and Tax Planning), which can be significant if you are not insolvent at the time of negotiation. I will also make sure that any agreement with a creditor is sound and complete, so that when we do reach an agreement, your credit record will be completely cleared.
In some cases, paying a creditor is not possible or desirable. In these situations, my office will help you determine if either Chapter 7 bankruptcy or Chapter 13 bankruptcy are options. Whatever the situation, and whatever you choose, you will be fully informed.
Becoming "creditor Proof"
What happens when bankruptcy is currently not an option and negotiating a settlement is not possible, but you have been sued by a creditor? It may be possible to become "creditor proof", at least temporarily.
I can help you plan to protect your bank accounts and savings from creditors. I will also review your situation and any lawsuit against you to determine if you are protected by your marital status. Liens normally can't effectively be placed on marital property when the underlying debt belongs to only one spouse. I will be able to give you a good idea of the urgency of your situation, and help you plan accordingly.
While you will not be fully protected from a creditor lawsuit until you either reach a written agreement on a settlement, or file a bankruptcy, I can help you take steps to protect yourself until you are in a better position to act. You are never truly "creditor proof", but it could be a temporary solution to your problems.
Debt Forgiveness and tax planning
Debt forgiven (or negotiated down) may be considered as taxable income by the IRS. Creditors who agree to negotiate a debt and take less than the total amount owed may issue a 1099-C "cancellation of debt" form to the debtor. They are normally required to do so on any debt forgiveness of over $600.
This will be a consideration when choosing between settling a debt or filing bankruptcy, because all debt discharged through bankruptcy is considered completely non-taxable. The possibility of receiving a 1099-C form is a consideration when negotiating a debt; however, there are several exclusions permitted by the IRS that may allow you to avoid paying income tax on forgiven debt.
The first exclusion (bankruptcy) has already been mentioned. All debts discharged through bankruptcy, no matter how large, will never be considered taxable income. For this reason, repaying a large debt through Chapter 13 bankruptcy, as opposed to repaying it through a debt consolidation, can potentially save you thousands of dollars. It is an important factor to consider when planning your financial course. However, there is another important exclusion to consider besides the bankruptcy exception, and that is "debtor insolvency."
Debtor's considered insolvent at the time of a debt negotiation may be able to avoid paying taxes on forgiven debt. You will want to inform your tax preparer, who will be able to file a form 982 "reduction of tax attributes". Insolvency simply means your debts are greater than your assets. This will often be the case for individuals facing numerous debt issues. In any case, you will want to contact an experienced tax preparer who is familiar with both forms, 1099-C and 982.
My office is prepared to help you consider all the possible scenarios and factors when negotiating a debt.
PATIENCE and waiting
Sometimes the best thing to do is... nothing. My office won't create a problem that doesn't exist for you. If waiting to solve your financial problems is the best option (for instance, your income is increasing, or your debts are not as great as you think), that is what I'll advise you to do.
I'm not afraid to tell a potential client they don't need my help. It's the right thing to do, and I believe that type of honesty wins clients and referrals ten-fold.
Whether your financial problems are simple or complicated, I can help you find a plan and a solution. Contact my office to start the process.