By Kitty J. Lin, Attorney at Law

Once you start missing payments to your creditors, chances are, after attempting to collect from you, your creditors will sell or transfer your debt to third party collection agency.  The objective of these collection agencies is to try to get some sort of payment from you.  Most of these agencies try to call you or send you letters indicating that they are willing to settle your debt for less than what you owe to the original creditors.  The question then becomes, should you take them up on that offer?  The answer is, it depends.  Here are some scenarios:

You are about to file for a Chapter 7 bankruptcy

If you are about to file for a Chapter 7 bankruptcy, which discharges all unsecured debt, then the obvious answer to the question of whether you should take the collection agencies up on their offer to settle the debt is “NO.”  There is no point in settling a debt which you intend on discharging through your Chapter 7 bankruptcy case.  Additionally, any debt you pay to creditors within 90 days prior to filing your bankruptcy case is considered a preference payment.  This means that the trustee may potentially go after the creditor and request the money (paid within 90 days) be paid back to your bankruptcy estate.  The trustee will then pay the money to your creditors equally.

You are about to file for a Chapter 13 bankruptcy, and you will pay less than 100%

If you are about to file for a Chapter 13 bankruptcy, and your monthly Chapter 13 payments will not pay 100% of the debt, the answer will depend on what percentage will be paid to unsecured creditors.  If your creditors are offering to settle your debt for 50% of what you owe, and you will only be paying 10% to your unsecured creditors, then the obvious choice is to reject the settlement offer.  If you will be paying 50% to your unsecured creditors in your Chapter 13 plan, and the creditor is offering to settle your debt for 25% of your debt, then it may be a good idea to take the creditors up on their offer and settle the debt for less than what you owe.  If you do not know approximately what percentage you will be paying to your unsecured creditors in your Chapter 13 plan, then it may be better to err on the side of caution and reject the settlement.  Remember, your creditors only get paid if they file a proof of claim in your Chapter 13 bankruptcy case.  If they do not file a proof of claim, they will not be paid.

You are about to file for a 100 % Chapter 13 bankruptcy

If, based on your circumstances, you know you will be paying off 100% of your creditors in your Chapter 13 plan, then your best bet would be to take the creditors up on their offers and settle your debt prior to filing for your Chapter 13 bankruptcy.  Chances are, if you are a 100% plan, you will need to pay a little interest on top of the 100% payment as well in the plan.  Thus, whatever offer your creditors are giving you would most likely be more favorable than if you were to pay them through your Chapter 13 plan, as you will be paying them over 100% in the plan if they file a proof of claim.  The preference payment issue would not come up in a 100% Chapter 13 plan, as all your creditors will be paid at least 100% of the debt

You do not qualify for bankruptcy

If you do not qualify for bankruptcy, or would like to avoid bankruptcy, then negotiating with these creditors is your best option to settle your debt.  Remember, you can always negotiate with these creditors!  You do not have to take their first offer!

If you would like to know more about your options, feel free to contact an experienced Fremont bankruptcy attorney or San Mateo bankruptcy attorney today at 877-9NEW-LIFE or 877-963-9543 for a free consultation.

By Ryan C. Wood

The idea of consolidating your debts and paying them off for less or sooner is a great idea in a bubble.  The reality is that it rarely seems to work and can cost you more money than merely making higher payments than the minimum payments on your existing credit card debts.  The question is does it work?  Well, as bankruptcy attorneys, we meet with clients every day that debt consolidation has not worked.  As bankruptcy attorneys everything we do is by Court order and it is black and white.  Bankruptcy is either right for you based upon your income, expenses or assets or it is not.  Bankruptcy also is usually less expensive than trying to get out of debt with a debt consolidation company.  Bankruptcy does not have to be the answer though.  Yes, even though we are bankruptcy attorneys, you can get out from under your debts yourself.

1.  You Can Consolidate and Negotiate Away Your Debts Yourself

Why do you need to pay a company to negotiate lower interest rates or negotiate a settlement of your debts?  Do these companies have some secret that allows them to obtain a better deal for you than you can obtain yourself?  The answer is no, they do not.  The typical debt consolidation company will tell you that they can take over the payment of your debts and negotiate with your credit card companies and lenders to obtain lower interest rates and reduce the amount of debt you owe.  You can do this yourself.  Just take a few minutes and call your credit card company and let them know you are having trouble making the payments.  You will be surprised at the results you can achieve by being persistent.  There are also not for profit organizations that you can seek help from for free.  You do not have to pay a company to reduce your debt.

2.  Pay Off Your Credit Cards With Smaller Balances First

The easiest way to pay off your credit cards is to get rid of the smaller balances first and then apply the money you would be paying to the smaller balances to the larger balance credit cards.  You will then hopefully be making significantly higher payments than the minimum payment on the larger balance credit cards.  This is not easy to do and takes a lot of discipline.  This approach is also assuming you have steady income, which unfortunately is not the reality for many given our economy.  If you can stay disciplined, over time you will reduce your debt and eventually pay off your credit card debt without a debt consolidation company or having to file for bankruptcy protection.

3.  Save Up Some Money and Settle Your Debts With Lump Sum Payments

Another approach is to save up a few thousand dollars and offer your credit card company a lump sum payment to settle the debts for less than what you owe.  This approach is again assuming you are able to save a few thousand dollars, which is not easy to do for many.  Many credit card companies will accept one-time lump sum payments for far less than what you owe them.  This is one way a debt consolidation company will assist you too, for a fee of course.  The debt consolidation company will request monthly payments from you until they have a lump sum to pay your credit card company and settle the debt.  Again, you can do this yourself.

4. What Does a Typical Debt Consolidation Company Actually Do For You Then

The answer is they make money at your expense and usually do not obtain the debt relief you originally thought you were going to get.  You may get some peace of mind for a little while, but ultimately if you did not have the money to make your credit card payments debt consolidation will not work.  The debt consolidation will show you how much money you will save over a few years by allowing them to pay your bills for you with lower interest rates.  These figures do not usually exist in reality.  These are marketing gimmicks that show results that they never achieve.  They will charge a fee, sometimes a flat monthly fee or a percentage of the monthly payment they request you pay to them.  The problem is not all of your credit card companies will do business with these companies, so you will have four of your credit cards being paid by a debt consolidation company and then you will continue to pay your other debts.  Time and time again we have clients that get sued by one or more of their credit card companies even though they are using a debt consolidation company.  It is usually the credit card company that will not participate in the debt consolidation company plan.  Once the lawsuit is filed, there is nothing a debt consolidation company can do for you and this is when most people seek the counsel of a bankruptcy attorney to finally obtain debt relief by Court order.  New laws have been passed to limit the business practices of debt consolidation companies.  The reality is that these companies are marketing machines.  It sounds great, but does not seem to work.

If you believe bankruptcy may be the best choice for you though, please contact our Bankruptcy Lawyer or Bankruptcy Lawyer today to schedule a free consultation (877-963-9543).