I recently had a few clients who were in debt consolidation and are now ready to move into Chapter 7 or Chapter 13.
First, let’s distinguish between debt consolidation and debt settlement. No, it’s not the same thing actually. However, both debt consolidation and debt settlement require negotiations with creditors because the purpose of both is either to reduce the payment by reducing the interest rate or to settle the debt owed by less than what is of. Does this seem complicated to you? That’s not really the case.
Let’s look at a customer case. He owes $60,000 worth of credit cards to 10 different creditors. He pays a minimum of $1,900 per month to keep all those maps up to date. The average interest rate for these cards is 21%. If the client continues to pay the minimum of $1,900 at 21% per year, it may take him more than 30 years to repay the principal to zero.
In other words, he would have paid $684,000 over 30 years to pay off $60,000 worth of credit cards in full. You don’t have to be a “stable genius” as you know, to realize that this is bad business for you and your family. Paying $684,000 over 30 years to pay off $60,000 in credit card debt is just plain stupid, as Forrest Gump’s Stupid does. As someone would say, “Sad!” It’s the same as chopping off both arms and both legs and both ears and nose to pay $60,000 in credit cards.
In consolidation, the consolidator will try to get each of your creditors to accept a lower monthly payment by agreeing to accept lower interest. The effect of lower interest is to shorten the time it takes to repay the principal, because more principal is paid with each payment. You pay the consolidator a lump sum, which it distributes to each creditor after the creditors agree to lower their interest rate.
Debt settlement, on the other hand, is where the negotiator negotiates with your creditors to agree to an amount less than what you owe in final settlement of your debt. You then pay the negotiator who reimburses the creditor.
Thus, consolidation and settlement are done through negotiation with your creditors. There is no court or judge involved in the process. Thus, the two are done by mutual agreement with the creditors.
One problem with consolidation or settlement is what happens when not all of your creditors agree to consolidation or settlement. Those who disagree can simply decide to sue you directly to get their money back and then take your bank accounts, garnish your wages and put a lien on your house and cars. So who wants that kind of legal hassle? There is no peace of mind. It’s like an open wound that keeps getting infected.
And, any amount reduced or saved becomes your income, so you will have to answer to the IRS for the extra income you made by reducing debt payments. Nobody wants to have that kind of problem with the IRS. Failure to disclose the income thus obtained may expose you to an audit and penalties. Another series of problems arises.
On the other hand, Chapter 7 and Chapter 13 are bankruptcy proceedings that discharge the debt. The Discharge Order clears your debt and gives you a fresh start in life in Chapter 7, or reorganizes your finances by allowing you to pay less than you owe, through the bankruptcy court system.
When filing Chapter 7 or 13, the court issues an automatic stay order against all of your creditors. It says your creditors can’t call you, take legal action against you, stop wage garnishments, stop bank levies, stop liens against your home and personal property. The stay gives you immediate peace of mind by ordering all your creditors to stop everything they are doing to recover their money as soon as the case is filed. No more calls in the middle of the night or early in the morning. No more letters and lawsuits to collect. No more wage garnishments. No more harassment from creditors day and night, forever. Immediate peace of mind.
What happens is that the bankruptcy court comes in and protects you and your assets from creditors and ultimately the court releases or cancels your legal liability to pay the debt. What’s better than that?
However, you must exempt your assets. There are two legal systems for exempting assets in the event of bankruptcy. Consult with a bankruptcy attorney. He or she knows what to do to exempt your assets. You can keep your home, cars, retirement accounts, and just about anything you own as long as you are able to legally exempt them. Thus, you keep all your assets, but you pay or erase all your debts at once. Before the discharge order is issued and after the case is filed, your creditors cannot touch you or your property. They can’t even call you. It’s like having Bruce Lee as your bodyguard. You become invincible. You then take a new start in life without any debt while keeping all your assets.
In Chapter 13, you might pay off some of your debt, depending on the value of your non-exempt assets. In the example above, if you had a home with a non-exempt equity of $10,000, you would only pay $170 per month for 60 months. After making all payments, the court will clear the balance of $50,000. In other words, instead of paying $1,900 per month for 30 years, you only pay $170 per month for 5 years, for a total of $10,000.
You pay the $170 to a court-supervised Chapter 13 trustee, a court officer. He distributes or pays the $170 to all your creditors. You only pay 16% of your total debt of $60,000. And the trustee can’t get away with your payments. There’s nothing quite like a Chapter 13 fiduciary running off and running off with your money. Everything you pay under your plan is guaranteed to pay your creditors, and the court will erase the rest of the outstanding debt as long as you complete your plan payments on time.
Once your bankruptcy is over, as long as you pay your new debts on time, your credit score will improve very quickly. The second year from filing, your credit score may already reach 600. The third year from filing, your credit score may already reach 670. This is how fast your score will improve as long as you manage a new debt with timely repayment. You can buy a car as soon as you get your discharge. Most car dealerships finance debtors who have just come out of Bk. You must bring your discharge order. Expect higher car loan interest if you buy a car as soon as you get your discharge, maybe 19%.
It is obvious. Even Walt Disney filed twice for Chapter 7 before his Disneyland venture was successful. The owner of Hershey Chocolates, the world’s largest chocolate company, also filed for Chapter 7 before his business succeeded. Bankruptcy is the best and most effective way to get rid of debt and start afresh in life without accumulating debt. Ask Mr. Disney and Mr. Hershey. They both became billionaires after getting a fresh start in debt-free life thanks to bankruptcy. Without Chapter 7, there would be no Disneyland or Hershey chocolates. Our world would be a sadder place indeed!
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Disclaimer: None of the above is considered legal advice to anyone. There is absolutely no attorney client relationship established by reading this article.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented over five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803 or 20274 Carrey Road, Walnut, CA 91789 .