Is bankruptcy a better way to handle my unwanted debts than utilizing a credit counseling agency or debt management company?

Answer: Almost always.  Here’s why:

There are two types of credit counseling/debt management companies:

  1. “Non-profit” agencies/companies. They receive funding from organizations such as The United Way, etc.  However, most of their funding comes from creditors. That’s right, your creditors.  Banks, credit card companies and large retailers foot the bill.  The creditors participating  return a percentage of the amounts paid to them by the agency.  The agency, in effect, works for your creditors and not you.  The agency contacts a person’s creditors to inquire as to the offer that each creditor proposes to be repaid usually over a five year period.  These original percentage amounts differ from creditor to creditor.  The kick-backs from the creditors involved are where the non-profit agency makes their real money.
  2. “For-Profit” agencies/companies. These agencies are usually the ones you hear advertising on the radio or see on television.   They also work on behalf of your creditors. They normally will have a person in debt pay into their repayment plan for a period of time to fund a “war chest”.  This theoretically would allow the agency to make some sort of lump-sum offer to satisfy a creditor debt.   Of course, they take their fee out of the creditor payments made to the agency.  Their fees are substantial enough to be able to advertise their business nationally in some cases.  However, there is no guarantee that any or all of a person’s creditors will even agree to a lump sum settlement.  Usually one debt at a time can be dealt with in this manner.  This can be a very expensive, time consuming and ineffective way for someone to attempt to handle their debts.  

Neither type of agency is willing to deal with missed payments on secured debts such as homes or vehicles.  However, a competent bankruptcy attorney usually can offer a way to get caught up on a person’s home or vehicle payments over a period of up to five years through a Chapter 13 bankruptcy.

Neither type of agency can deal with or stop collection lawsuits that are pending.  Bankruptcy usually can stop collection lawsuits and proceed to make their debts dischargeable as an unsecured debt in a Chapter 7 or Chapter 13 bankruptcy.

Neither type of agency can deal with or stop collection efforts of a judgment that was obtained in a state court lawsuit.  Bankruptcy usually can end collection efforts on judgments such as a garnishment of wages or bank accounts along with protecting assets from seizure by the creditor holding the judgment.  Bankruptcy also usually stops legal procedures (called “discovery”) aimed at determining what assets a person in debt may own that can be taken by a creditor in an attempt to satisfy their debt.   These discovery procedures may include oral depositions (statements under oath), answering written questions known as interrogatories and requesting the production of documents (such as bank statements, deeds, vehicle titles, paystubs, etc.).

Neither type of agency can stop a creditor in a repayment plan who just decides after months of payments that they want their money faster and then break away from the plan and sue the person for money damages.  As stated above, a bankruptcy usually ends all collection lawsuits and makes their debts owed at the time of filing the bankruptcy dischargeable. In bankruptcy the creditors are usually locked in and not allowed to break away and pursue collection activities.

Neither type of agency will determine if a debt is not collectible due to the passage of time (statute of limitations).  They may often include that debt in the repayment plan like all the others.  A competent bankruptcy attorney will help to determine if the debt is too old to be collectible and whether it needs to be handled or objected to.

Neither type of agency can protect the person with debt from receiving an IRS Form 1099 showing the amount of debt forgiven by that particular creditor in the repayment plan.  In many instances, depending on income level, a person will have to include the amount of the debt “forgiven” as income on their tax return covering the year that the debt was forgiven and would have to pay tax on that amount.  In bankruptcy, no IRS Form 1099 is given because those debts would be discharged and not forgiven (unless forgiven prior to filing the bankruptcy).

It has been my experience that credit counseling/debt management repayment plans seldom are successful and terminate early in the process for some of the same reasons I stated above.  It often is a waste of money and time and may leave the person worse off than if they had not participated at all.  I have heard horror stories of companies not stopping the withdrawal of plan payments from the person’s bank accounts after being appropriately notified which has led to those persons becoming behind on their mortgage and car payments!

A person may qualify for a Chapter 7 bankruptcy and not have to pay anything back to their creditors.  Also, the Bankruptcy Code provides a person(s) who has/have substantial income or assets that need to be protected from seizure by creditors, to file a type bankruptcy that has a  repayment plan known as a “Chapter 13”.  This type of bankruptcy allows you to keep your assets and the monthly payments are almost always considerably lower than any credit counseling agency or debt management company repayment plan.  Therefore, DON’T SIGN UP WITH A CREDIT COUNSELING AGENCY OR DEBT MANAGEMENT COMPANY UNTIL YOU COME IN FOR A FREE INITIAL CONSULTATION TO DISCUSS YOUR OPTIONS.  IT COULD SAVE YOU A LOT OF MONEY AND HEART BREAK!  EVEN IF YOU HAVE SIGNED UP WITH ONE OF THOSE COMPANIES, GIVE ME A CALL AND LET ME SHOW YOU HOW MUCH YOU MAY BE ABLE TO SAVE USING THE BANKRUPTCY PROCESS INSTEAD.

For additional information on how a bankruptcy can be a much better option for you than a credit counseling agency plan or a debt management plan or to schedule an appointment for a free initial consultation to discuss how I may be able to help you rid yourself of your debt burden, call me at (727) 898-2700 (Pinellas County) or at (863) 802-4700 (Polk County).