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Getting Your Debt Problems under Control and Avoiding Bankruptcy
Excerpted from Complete Personal Bankruptcy Guide by Edward A. Haman ©2006
One alternative to bankruptcy is to seek credit counseling. Even if you decide to file for bankruptcy, you will first need to see a credit counselor. The 2005 revisions to the Bankruptcy Code prohibit you from filing a bankruptcy petition until you have gone through credit counseling. A credit counselor will contact your creditors to try to establish a new payment plan, and will help you set up a budget you can handle.
Beware of private debt counselors or offers for debt consolidation loans. Such "help" often only results in one large payment instead of many smaller payments, and you will still have trouble making that monthly payment. Furthermore, such operations charge counseling fees that only take away needed cash. Soon you may be facing bankruptcy again. Also, avoid the now-famous home equity loan. This can end up converting your unsecured debts into secured debts, which means that you may not be able to file for bankruptcy without losing your home.
You will want to use one of the numerous credit counseling agencies that have been approved by the U.S. Trustee's Office. You can obtain information about the approved credit counselors in your area from the local trustee's office, or through its website. To access the information on the Web, go to www.usdoj.gov/ust. Click on "Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005," then "Credit Counseling and Debt or Education Information." Click on "Approved Credit Counseling Agencies," then select your state. You can then scroll down and look for the agencies in or near your town. If there are any fees for credit counseling, you will be responsible for paying them.
A consumer credit counseling plan is similar to a Chapter 13 bankruptcy, but on a less formal basis. It is also cheaper than court filing fees and other costs associated with bankruptcy. Your credit report will look better with a record of credit counseling assistance than it will with a record of having filed for bankruptcy. A credit counseling plan will require you to pay your debts in full, whereas a Chapter 13 plan may only require the payment of a portion of your debts.
In theory, there is nothing a credit counselor can do that you cannot do. On a practical level, creditors are more inclined to listen to a credit counselor. Your creditors do not want you to file for bankruptcy, because it means they will not get paid in full. Therefore, they should have a strong incentive to be reasonable. Your main goal is to get the creditor to allow you to make smaller payments. This is typically accomplished by reducing the interest rate, extending the length of the loan, or both.
George has a $1,500 balance on a credit card from a local department store. His payments are $74.89 a month, and the balance will take two years to pay off. If the department store will agree to accept payments over an additional year, George's monthly payment will be lowered to $54.23 a month. This lowers his monthly payment by $20.66. If he has ten loans like this, he could save over $200 per month, which may be enough to enable him to keep up his payments based on his income.
Planning a budget. First, identify the most important item you have to pay for each month, which is probably your rent or mortgage payment (unless you are prepared to go live with friends and relatives).
Second, identify your next most important expense, and so on. For each item, ask yourself if there is any way to reduce the amount you spend each month. If you can reduce the amount, then use the reduced amount and subtract it from the total. Your essential payments are for housing (including utilities), food, and transportation
(probably your car).
There are also a few things to consider as a means of paying off some of your debts. These include making a real effort to stop buying nonessential items, borrowing from a retirement plan or life insurance policy, and taking money from a college tuition or other savings account.
In order to survive and earn a living, you need a place to live, food, and a way to get to and from work. If you are unable to find a way to make these essential payments with your income, you may want to apply for some type of public assistance (welfare) in addition to filing for bankruptcy.
Once you have subtracted the essential living expenses, you will be left with the total remaining income available to pay your creditors and other expenses. (Absolutely last on your list should be the expenses for recreation, travel, or entertainment.) Now, start subtracting your payments for loans that are secured loans. These are any loans in which your property can be repossessed if you do not pay. Most credit card debts are not secured by any particular property. The most common secured loans are for homes (including home equity loans), automobiles, boats, and occasionally, furniture. If the only paper you signed was the typical charge card receipt for Visa, MasterCard, Sears, or other department store charges, the loan is not secured.
By now, you are probably left with a small amount of income (if any at all) with which you can make payments on the rest of your loans. Add up the remaining loan payments, and subtract them from your remaining income. If your answer is -0- or more, whatever adjustments you made to your expenses were enough to eliminate your debt problem. Now your only problem is to try to live according to your new budget.
However, if your answer is less than -0-, it represents how much you need to reduce your monthly payments in order to avoid having to file for bankruptcy. Your next step is to try to persuade your creditors to adjust your payments to fit your remaining income.
Dealing with creditors. Your next task is to create a new payment plan to present to your unsecured creditors. You need to come up with a plan that is fair to all of your creditors. For your unsecured creditors, you will want to reduce each payment by a proportional amount. First, take the total monthly payments of your remaining debts, and divide it by the monthly shortage. This will give you the percentage you need to reduce each debt by in order to match your remaining income.
Once you have worked out your new proposed payment amounts, it is time to contact your creditors with your plan. There is an example of such a letter below.
Fill in the date, the name of each creditor, and the creditor's address at the top. You will need to make a copy of this letter for each creditor. Just fill in the blanks according to your new payment plan, fill in your name and address (so it can be read), sign your name, and mail a copy to each creditor. Be sure to type in your name, address, and account number below your signature.
RETURN RECEIPT REQUESTED
Dear Sir or Madam:
My current financial situation may require me to file for bankruptcy protection. In order to avoid this, I am requesting that my payments on your account be restructured. This will allow me to pay you the full amount you are owed.
My net monthly income is $_______________________________. After paying essential expenses, such as housing, utilities, food, clothing,
transportation for work, and medical expenses, I am left with a monthly disposable income of $____________________________. Out of this balance I am able to pay my creditors as follows.
CREDITOR OLD AMOUNT REVISED AMOUNT
This schedule represents an equal pro rata reduction for each unsecured creditor. Please let me know if this new arrangement is acceptable. Unless I hear from you before the next payment is due, I
will assume this proposal is acceptable, and will make my next payment according to the revised amount.
Thank you for your attention to this matter.
Now, sit back and wait for your creditors to answer. You will note that the form letter states that your next payment will be according to the new schedule, unless you hear from the creditor beforehand.
You may be asking, Why should the creditors accept reduced payments? If the creditors really believe you are serious about bankruptcy and see that you have a workable budget, they have every reason to accept your plan. The alternative is to let you declare bankruptcy, in which case they will receive less than the full amount owed (and possibly nothing at all).
You should try to get your unsecured creditors to lower their payment requirements in order to fit your budget. Only after this fails should you contact your secured creditors about a new payment schedule. You may wonder why secured creditors would agree to lower payments, when all they have to do is repossess or foreclose. Even a secured creditor would usually rather get paid than take back the property. It takes a lot of time and money to repossess and resell property. If you do file for bankruptcy, it will take even more time and expense. A bankruptcy will not stop foreclosure or repossession, but it will delay it. Therefore, most lenders will work with you to try to avoid foreclosure, repossession, or bankruptcy.
The key to success is showing the creditor a fair and reasonable payment plan that is clearly within your ability to maintain. If this does not work, you can still go to a credit counselor, and can ultimately proceed with a bankruptcy if necessary.