Bankruptcy & 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" 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 income.

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.
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 option.

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.