& Other Options
Which debt relief option is best for you? That depends
upon the nature of your debt, your income and expenses, the value
of your possessions and whether or not foreclosure or repossession is
imminent. One or more options may be available to you. Choosing
the right option in an individual case requires analysis by a qualified
attorney. Here are brief descriptions of some alternatives.
CREDIT COUNSELING & DEBT NEGOTIATION
"Credit Counseling" and "Debt Negotiation" are
available in various forms. Some organizations advertise
that they will negotiate payment plans with creditors to reduce
interest and make payments on all your debts over time, based upon
your income. This may work if you have relatively small debt. Be
aware that many of these organizations, although they may be
non-profit, are supported by donations from the same creditors that
are billing you. Ask the organization who its contributors
are and check out disclaimers often available on their websites. Also,
although the original payment plan they set up may seem reasonable,
it might not actually work since some creditors may not accept the
interest rates used in calculating payments. This can result
in your debt hardly being reduced (or even increasing) early
in the plan. Your payment plan may need to be be extended or
the payments may increase. Ask which creditors have accepted
the plan, at what interest rates and whether the creditors
can later withdraw from the plan. "Debt Negotiation"
usually involves a reduction in the amount owed in exchange for
a lump sum payment to the creditor. Accordingly, the borrower
needs to have adequate cash available to complete the settlement.
One should also consider the tax consequences of settling a debt for
less than the full amount owed. Unless it is done in
a bankruptcy setting, the portion of the debt forgiven is taxable
Difficult financial problems require powerful solutions. The
U.S. Constitution mandates that Congress establish uniform
bankruptcy laws throughout the United States. These laws provide
a means to protect property from creditors and reduce or eliminate
debt. Filing a bankruptcy proceeding not only stops collection action but also can stop foreclosure and repossession.
There are three commonly used "Chapters" of the bankruptcy
Code: Chapters 7, 11 and 13. Chapter 7 is used most often
and it eliminates most types of debt, protects exempt property and
does not require any re-payment of unsecured debt. Chapter
13 is used by individuals and small businesses to reorganize debt,
stop foreclosure and repossession and provides for a plan of repayment.
Chapter 11 is reserved for corporations or individuals with very
large debts. Filing bankruptcy is an important decision, which
should be made only in consultation with a qualified bankruptcy
attorney. For answers to some common questions about bankruptcy
go to Frequently Asked Questions.
OFFER IN COMPROMISE - TAX DEBTS
If you owe taxes to the IRS one method of settling the liability
is through a process called an "Offer in Compromise".
The IRS has a specific procedure for requesting this relief
A taxpayer seeking to reduce his liability through this process
must meet certain criteria established by IRS rules. There
is an analysis of the taxpayer's ability to pay including the value
of his possessions as well as his income and expenses.
If an application is accepted there can be a very significant reduction
in the amount owed IRS. However, full payment of the amount
of the accepted offer must be paid in a limited time. Note that
an excellent alternative to reducing or even eliminating tax debt may
be through bankruptcy proceedings. This is a complex area
and one should consult a qualified attorney to help choose the best
In situations where a small business owner, or in some cases a consumer,
has a loan or loans which are secured by real estate or equipment,
negotiating a workout with the secured lender can be an option.
The status of collection activity, the current and future ability
of the borrower to pay, the value of the collateral and the flexibility
of the lender are all factors in determining whether a workout can
be successfully negotiated. Since workouts usually require
the borrower to waive some legal rights, it is important for
him to be represented by qualified legal counsel during negotiation
and in the execution of the final agreement.