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Pros and Cons of Chapter 13 Bankruptcy

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If you make more than your state’s median income and are looking to clear away high, unsustainable debts through bankruptcy, and you have too much disposable income to qualify for a Chapter 7 bankruptcy, a Chapter 13 bankruptcy may be a good option for you.

With a Chapter 13 bankruptcy, your debts are reorganized and you often pay just portions of your outstanding debts to your creditors and you’re also able to keep your assets. It’s called Chapter 13 because it is contained within Chapter 13 of the U.S. Bankruptcy code.

Here’s a closer look at the pros and cons of Chapter 13 bankruptcy.

Also known as a wage earner’s plan and re-organization bankruptcy, a Chapter 13 bankruptcy allows consumers to repay some of the debts they owe through a repayment plan lasting either 3 or 5 years. Once a repayment plan is complete, all other debts that are eligible for discharge during bankruptcy will be cleared away. A key advantage of filing for Chapter 13 is that you get to hold on to your assets, so if you’re worried about your nonexempt assets and property being at risk, then it may be an option to consider.

Chapter 13

A Chapter 13 bankruptcy is noted on your credit record for up to seven years, three years less than with a Chapter 7 bankruptcy filing. In both instances, a public notice item of the bankruptcy is listed on your credit report. Individual accounts listed in your bankruptcy proceeding will be removed from your credit report within 7 years as well.

From a credit perspective, a Chapter 13 bankruptcy is more favorable than a Chapter 7 bankruptcy. It makes sense because with a Chapter 13 bankruptcy you are agreeing to re-organize and pay back a portion of the debts that you owe, whereas with a Chapter 7 bankruptcy, in many instances, debts may be cancelled without payment to creditors.

From a dollar and cents point of view, one disadvantage of a Chapter 13 bankruptcy is you’ll likely pay back more of the debts that you owe than you would in a Chapter 7 bankruptcy, but you also make good in even a small way on all the debts that you owe. All your creditors are likely to receive at least some payment from you when you file a Chapter 13 bankruptcy.

How Chapter 13 Repayment Plans Work

With a Chapter 13 bankruptcy repayment plan, you do agree to pay some debts in their entirety. These debts include child support, alimony, wages owed to employees and some taxes. Your repayment plan also includes your current secured debts such as auto and home loans and any overdue amounts owed on these loans.

After making these payments, any income that you have left gets applied to your unsecured debts such as credit cards, medical bills, and personal loans. With a Chapter 13, you won’t need to pay your unsecured debts in full, but you will need to show you are applying your remaining disposable income to this debt.

This type of bankruptcy is designed for consumers to re-organize their debts and pay back a portion of what they owe with future income, while maintaining their assets.

If you’re unable to complete your repayment plan in a Chapter 13 bankruptcy due to financial hardship such as being laid off from a job or a medical emergency, your bankruptcy trustee may modify your repayment plan or the court may allow you to discharge your debts due to hardship. Another option if you are unable to complete a repayment plan through a Chapter 13 bankruptcy is to convert to a Chapter 7 bankruptcy.

Lowering Your Repayment Plan

Claiming exemptions on assets and property will help to lower the amount that you’ll pay your creditors through a Chapter 13 bankruptcy proceeding. These exemptions vary from state to state, so it’s important to research the property exemptions you may claim in your state when filing. It will lessen the amount you ultimately owe your creditors and make your repayment plan more manageable.

There are federal exemptions for property and assets to consider, as well. You may wish to consult a local bankruptcy attorney to discuss the best exemption strategies for you as you contemplate bankruptcy.

Exceptions to the Chapter 7 Means Test

The U.S. Congress was concerned that too many higher income consumers were wiping away debts through Chapter 7 bankruptcy instead of paying back parts of their debts through a Chapter 13 bankruptcy proceeding, so in 2005, a law was passed establishing a means test for qualifying for Chapter 7.

Those who make less than the median income in their state may file a Chapter 7 bankruptcy without taking a means test, and those who make more than the median income must pass a means test first, but there are exceptions to this rule.

If 50 percent of your debts are non-consumer debts such as business debts, you won’t need to take a means test to qualify for Chapter 7 bankruptcy even if your income is above the state median. Disabled veterans, members of the National Guard and military reserve also may qualify for exceptions to the means test.

Everyone else earning more than the median income in the states where they live must take a means test to qualify for Chapter 7 bankruptcy. If it’s determined that you have too much disposable income, you won’t qualify, but Chapter 13 may still be a viable option for you.

Before qualifying for a Chapter 13 bankruptcy, you must complete credit counseling with an approved credit counseling agency. To find one near you, visit www.usdoj.gov/ust and scroll down to “Credit Counseling and Debtor Education”, or ask your bankruptcy attorney who they recommend to their clients.

Chapter 13 isn’t for Businesses

Businesses are unable to file a Chapter 13 bankruptcy in order to re-organize debt and should look to a Chapter 11 bankruptcy for that purpose instead. If you happen to own a business, you can still file a Chapter 13 bankruptcy as an individual and you can include business-related debts for which you are personally liable.

There are two exceptions. Stockbrokers and commodity brokers are not allowed to file a Chapter 13 bankruptcy for their personal debts.

Pros and cons of Chapter 7 Bankruptcy

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If your debts are unsustainable, and you have few assets, you may wish to clean the slate by filing for a Chapter 7 bankruptcy. Even those of us with assets we want to keep, such as your home or car, may find that it’s more suitable for their situation as well. As consumers, we will typically find we have two types of bankruptcy options. A Chapter 13 bankruptcy re-organizes a consumer’s debts and establishes a repayment plan rather than wiping the debts away like Chapter 7 bankruptcy.

I am going to focus on chapter 7.

The process takes three to six months and a Chapter 7 trustee oversees the process, selling a debtor’s non-exempt assets and then distributing the proceeds to creditors, according to the priorities established in the U.S. Bankruptcy Code.

Referred to as Chapter 7 because it is contained within Chapter 7 of the U.S. Bankruptcy code, this type of bankruptcy also is called a “liquidation” bankruptcy or a “straight” bankruptcy. This type of bankruptcy is the most popular form of bankruptcy in the United States.

No Asset Bankruptcy Cases

Most Chapter 7 bankruptcy cases that are filed in the United States are no-asset cases, meaning the debtor does not own any non-exempt assets, which could be sold to pay for debts owed to creditors. In a no-asset Chapter 7 bankruptcy case, a trustee will file a no asset report for your case and your creditors will not receive any payments from you through the bankruptcy proceedings.

Each state has its own set of exemptions that allow consumers to protect certain types of property and assets when filing for Chapter 7 bankruptcy. And there are federal exemptions as well. The reason behind the exemptions is the belief that you need a certain amount of assets and property to make a new start and sustain yourself and your family after filing bankruptcy.

Chapter 7 Bankruptcy

For example, when you file bankruptcy a motor vehicle exemption may protect your family’s car. If all or most of your car’s equity is covered by a motor vehicle exemption, the trustee in a Chapter 7 bankruptcy filing will not be able to include your car when selling off assets to pay debts.

Making the Most of Property Exemptions

In Maine, the motor vehicle exemption is $5,000 so if you live in that state and your car is worth say, $4,500, the bankruptcy trustee will not be able to touch your car. In Florida, the motor vehicle exemption is just $1,000. In Kansas, this exemption is $20,000 when that vehicle is “regularly used for the transportation to and from a person’s regular place of work.”

In some states, these motor vehicle exemptions are higher for married couples and if the vehicle in question is equipped for people with disabilities.

Because of the range of exemptions, it is important to research the motor vehicle exemption in your state when contemplating bankruptcy. (Also be aware if you are delinquent on car payments, a lender may still be able to repossess your car before or after bankruptcy.)

Homes are another big consideration and exemption allowed in bankruptcy proceedings. Some or all of the equity that you’ve established in your home may be exempted in a Chapter 7 bankruptcy proceeding because of your state’s homestead exemption. As with motor vehicle exemptions, homestead exemptions vary greatly between states, so it’s important to research the laws where you live.

To learn more about the bankruptcy property exemptions in your state, reach out to a local bankruptcy attorney.

Pros and Cons of Chapter 7 Bankruptcy

As mentioned, Chapter 7 bankruptcy has a number of advantages for consumers. Filing this type of bankruptcy may allow you keep all or most of their assets thanks to exemptions. The whole process typically takes three to six months, which is shorter than other types of bankruptcy.


In contrast, a Chapter 13 bankruptcy requires a three- or five-year repayment plan.

Upon completion of the bankruptcy, the consumer walks away essentially debt-free, other than loan payments for assets they were able to keep, their home and their car, plus any non-dischargeable debts, such as student loans, recent taxes and unpaid child support.

A Chater 7 bankruptcy will remain on your credit report for up to 10 years, whereas a completed Chapter 13 bankruptcy will remain for up to seven years. In both instances, a public record item associated with the filing of the bankruptcy is listed on your credit report. And impacted individual accounts will fall away from your credit report within seven years. So, a Chapter 7 bankruptcy does have a longer lasting negative impact on your credit by three years than a Chapter 13 bankruptcy would. But do not let these credit reporting facts fool you. People who file chapter 7 are in better shape to get new credit and meet life goals, like buying a home or car, long before someone who files chapter 13, and often before the many people who choose a bankruptcy alternative like debt settlement or credit counseling.

The Income Means Test

Because of income, not all consumers qualify for Chapter 7 bankruptcy.

A 2005 law added a means test, which was meant to prevent higher income debtors from cancelling their debts through Chapter 7 bankruptcy rather than repaying a portion of their debts through a Chapter 13 bankruptcy.

If your income is lower than the median income in your state then you will qualify for a Chapter 7 bankruptcy. But, if your income is higher than the median income in your state, you’ll have to pass a means test. This test compares your income and some expenses to see if you would be able to repay a portion of your unsecured debt.

But there are exceptions to taking this test if you do have higher income than your state’s median income. If 50 percent of your debts are non-consumer debts such as business debts, you may not need to take a means test to qualify for Chapter 7 bankruptcy.

Disabled veterans, members of the National Guard and military reserve also may qualify for exceptions to the means test.

Regardless of income, you must complete credit counseling with an approved credit counseling agency to qualify for a Chapter 7 bankruptcy. For a list of approved agencies in each state, visit www.usdoj.gov/ust and look for “Credit Counseling and Debtor Education.”

For a Chapter 7 bankruptcy, you will need to provide information on your current income and current living expenses, your property and assets, including property that you will be claiming that your state allows you to exempt from the proceedings.

If you have questions about how your state sees your assets as exempt, or whether you make too much money to file chapter 7, post in the comments below and include the state you live in.

Debt is a Bully with a Big Stick

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If you’ve already read my first article, 5 Steps to Get Out of Financial Purgatory, you know that we’ve reached step #3 on the list. And, although, I am definitely not an expert on getting out of debt, life has taught me that you can’t wish it away or bury your head in the sand. I know, because I’ve tried. Debt, like the notorious bully, will grow bigger, punk you for your lunch money, and may even morph into something scarier later on.

Debt, as a whole, may contain an array of both secured and unsecured debt, but debt is debt and there are solutions for most debts that have gotten out of hand. How do you know it’s out of hand? Well, can you save money? Are you paying your bills on time? No? Then, it’s time to take a closer look at your finances. Is it worse than that? Are debt collectors breathing down your neck? Were you surprised by a Summons at your door? You’re not alone, and there is still hope.

Credit card debt, specifically, is the third largest debt in the U.S. and can be pretty damned sneaky with introductory rates, annual fees, late fees, and the promise of “rewards”. And, I bet when you applied for that credit card, you probably thought you could pay off the balance every month, or at least pay more than the minimum payments, and it would be paid off in no time. No harm, no foul. Unfortunately, that’s not always the case, as life (or other bills, debts) can and does get in the way.

“All told, the average American today owes about $225,000 in debt, in a country where the median household income is just barely more than $53,000.” – Credit.com

Debt can grow fast.

When introductory rates fall to the wayside, debt can grow bigger due to interest rate hikes, late fees, and annual fees. That can set you back a bit, but if it goes to collection, that can be when you’ll really see the fees add up. If you let it go long enough, it will get so big, you may be inclined to throw your hands up and give in, but I would caution you in doing that.

Debt can punk you.

When debt starts to spiral out of control, it will start to affect other areas of your life, and even steal things from you, now and in the future. As many of you probably already know, money problems can create friction in your relationship and stunt your family’s ability to do the things you need to do. Being delinquent can also hurt your credit, making it more difficult for you to  purchase a house or vehicle later on.

Debt can morph.

What I mean by this is that your debt (credit card debt, medical bills, etc) can be bought by debt buyers, be turned over to lawyers, and you can be sued. All of the sudden that debt has become a judgment, which now has to be dealt with differently. Judgments are more complicated to settle, and can cause more damage if you don’t take action (garnishments, liens, etc).

Debt can start small, but grow into a seemingly unmanageable size. Get help.

Options to Help You Get Out of Debt

Pay it Off

The most obvious thing to do is to not acquire anymore debt and pay off your current debt by any means necessary. I’m sure you’ve heard of the debt roll-up, stacking, the ladder or avalanche method, or the ever popular, debt snowball. Most of these repayment methods all follow the same basic principle, and focus on the debt with the highest interest rate (you can also try a balance transfer to lower interest rates). For some, this may be hard to do if their highest interest rate debt is also their highest monthly payment. If you need to start small, then do the “snowball” and make more than the minimum payment on your smallest debt (regardless of interest rates) and roll it up from there.

Additionally, you may have some savings you don’t want to part with, but putting it towards your debt will most likely save you hundreds (if not thousands) of dollars in interest charges. Another options is to borrow money from friends and family to pay off debts in full, then repay the loan to your brother or parents interest free. Or, maybe you have a car, furniture, or jewelry you can sell that will enable you to throw some more money at your debts – the faster you pay it off, the better. Where there’s a will, there’s a way, my friends!

If paying is not an option for you, then keep reading.

Credit Counseling

The time to consider credit counseling is when you’re just starting to miss payments on your credit card bills, store cards, or medical bills. When this happened to me several years ago, I walked in to a local CCCS office and asked for help. They asked me to fill out some paperwork, then cut up my credit cards right there in the office (ouch). They then explained how they would get lower monthly payments, then consolidate them altogether so I could just make a single payment.

I’m proud to say that 18 months later, things were back on track, but you do have to qualify for credit counseling services. This is not necessarily difficult, but it’s worth noting, and you can learn all the details by reading Michael’s report on lowering monthly credit card payments.

Having been in credit counseling taught me a valuable lesson at a fairly young age (that would, unfortunately, revisit me later in life):

“Mistakes are the growing pains of wisdom.” – William Jordan

Debt Consolidation

Consolidation is for those who want to save on interest, but haven’t fallen behind on their credit card payments. It’s not for everyone, and consolidation isn’t as easy to do as it used to be, but if you’re 1) not behind on your credit card bills – yet 2) want lower interest rates 3) are willing and able (credit qualified) to open up a 0% interest account with a large enough credit line to cover your high interest rate balances, then this might work for you.

Consolidating your credit cards can be a bit tricky, as you may have to bounce from one card to another (to maintain those nifty intro rates), and you can’t become delinquent, as that would affect your credit score, thereby affecting your ability to open the large line of credit that would help you in the first place. If you have a credit card with a lower interest rate and some room to spare, you might be able to do a balance transfer. And, depending on your current rates and credit score, you might also consider a consolidation loan through peer to peer lending such as Lending Club or Prosper.

If you can walk the fine line, then by all means, start walkin’.

Debt Settlement

This option is for those who have already fallen way behind on their credit card bills. Getting a good settlement requires communication, timing, a lump sum payment, and hardship. You can call your creditor on your own or you can hire someone to do it for you, but you should first consider whether debt settlement is an appropriate solution for your situation and learn the fundamentals of getting a good settlement.

Debt settlement is for specific financial situations and will not work for everyone, and is something you do before considering bankruptcy.

I have settled debts in the past. The discounts I was able to negotiate were because the debts had gone so long without payment. I was lucky to not have been sued for collection. I could have filed for bankruptcy, but the balances on the debts I had to quit paying were relatively small. Had my debt load been bigger I would likely have chosen to wipe the debts out with a chapter 7 filing.

Bankruptcy

Bankruptcy is used when your credit card and other debts have become overwhelming. It’s considered a last resort, and although bankruptcy has negative connotations, that’s not how it should be viewed. Both my sister and some of my friends have been through bankruptcy. I don’t view them as failures, but as people who looked at their situation and made the best financial decision they could for themselves. What else can you do?

If you’re considering bankruptcy, keep in mind that you will be filing for Chapter 7 or Chapter 13 (7 will require a means test to qualify, depending on your state). There will also be a cost involved when you hire a bankruptcy attorney, but your initial consultation should be free and it’s highly recommended to get your questions answered, even if you decide against going this route.

More importantly, consider bankruptcy as a second chance. You have the opportunity to get rid of your debt and start over, and this time you can do things differently!

Doing Nothing

This really isn’t a viable option for anyone. Debt is like cancer…early detection and immediate action to eradicate the problem is vital for your success. In doing nothing, you’re allowing the banks, collectors, lawyers, and courts to decide your fate. And, believe me when I say that they do not have your best interests at heart.

The only time doing nothing might make even a little bit of sense is if you’re having hardships such as medical issues, divorce, brief unemployment, or some other temporary life event that would consume income that would otherwise be used to pay off your debts. If you are judgment proof (little to no income and/or assets that are exempt in your state), doing nothing about collection debts can mean looking over your shoulder…. forever.

Look, dealing with debt is, at best, a real pain in the ass. And, the longer you let it go, the harder it’s going to be to get rid of it. BUT, no matter what method you use, when all is said and done, I promise you’re going to feel like you just crawled out of a 6-foot hole and saw your first ray of sunshine.

Grab Your Stick

Debt can definitely come off like a bully, pushing you around and making your life miserable, but only if you let it. Take control of the situation, be brave, and fight back! Bullies all have one thing in common: they have a deep-rooted fear that you will stand up to them one day.

Do your homework. The above-mentioned methods for getting out of debt can be extremely helpful, but you have to pick the right tool for the job. So, assess your financial situation, find where you fit in, and get to work.

How to find and interview the bankruptcy attorney you will hire.

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Not all bankruptcy attorneys are created equal. That is not shocking. The same could be said about finding help in any profession or job that requires expertise and training. That said, finding the right bankruptcy attorney for you is not something that should prove difficult for most of us. But there are some things I would encourage you to both look, and look out for, when you go about consulting with attorneys and their staff.

Having worked with people to resolve problem debt by choosing bankruptcy alternatives for more than 20 years, I have referred more people to attorneys than to my main debt relief niche of debt settlement. That is not just because you should look at the pros and cons of bankruptcy as part of any due diligence into how to solve your debt problem, but because debt settlement cannot compete with chapter 7 bankruptcy for speed and overall cost when resolving problem debts for most people.

My focus in this post will be tips for how to interview your bankruptcy attorney with a chapter 7 focus, though chapter 13 bankruptcy filers can apply all of this too.

Chapter 7 attorney fees are not all that important.

Depending on the reason you need to hire an attorney, your fees can be all over the place. That is not the case with the amount of fees chapter 7 attorneys will charge. Their fees tend to be within a few hundred dollars of each other, and are often more related to where you live (coastal cities tend to have higher chapter 7 attorney fees than what those of us living inland often see).

Two reasons why attorney fees when filing chapter 7 bankruptcy stay fairly consistent:

  1. If your chapter 7 filing does not involve many assets your case is going to be pretty straight forward. There will not be any notable amount of “lawyering” that will be necessary.
  2. Bankruptcy judges and trustees would be alerted to uncommon, or inflated chapter 7 fees. And because court fees and costs are going to be uniform, there is not much  to elevate your average chapter 7 filing to total costs from A to Z anywhere over two thousand dollars. In other words, the court system keeps bankruptcy lawyers from fee gauging people filing no asset and uncomplicated chapter 7’s.

There are some exceptions that could require an attorney to incur more than the average amount of hours, such as attempting to discharge student loans, someone having multiple asset interests, and other things that can put a kink in a straight chapter 7 bankruptcy, but those are not the norm. And if you have special considerations in your bankruptcy, it would generally cause me to stress the importance of key attorney attributes and experiences that I cover below even more.

For these reasons, fees are not generally a part of what I suggest you use as a comparison for the bankruptcy attorney you ultimately hire. If you think that fees could be a concern, post more about your situation in the comments below. With that out of the way….

The good things to find in a bankruptcy attorney.

I have spent a good amount of years working with people to help them resolve their debt. My approach has nearly exclusively been to help people find the quickest path to not just debt relief, but to accomplishing the goals they have for when the “debt dust” settles (usually with a 2 to 3 year view). And sometimes the quickest path to relief from debt can work against reaching your goals. When that happens, you want to know about it.

I can candidly tell you that not everyone in the debt relief industry works with those two things prioritized, let alone telling you to spend your money and time on another option that is a better fit for reaching your goals, even if that means losing you as a customer or client. And just because an attorney has a dedicated practice in the area of consumer law (that is the category that chapter 7 and chapter 13 bankruptcy fall under), does not mean they are good at it, or that they are going to help you understand how to make the most of what is already a bad situation.

Here are some things you can immediately look for when consulting with bankruptcy attorneys, paralegals, and paraprofessionals offering debt relief assistance through bankruptcy.

  • Are all of the questions you are being asked (yes, there will be many questions) dedicated to numbers and figures?

Details about your income and expenses are necessary, no doubt, you cannot start your bankruptcy without knowing what you can qualify to do, and with which accounts. But I find bankruptcy professionals are overly focused on this aspect of the process. I encourage people to listen for leading questions the attorney or other debt relief professionals should be asking. These questions can include:

  • Do you or any of your children plan on applying for student loans in the next 3 years?

Bankruptcy can impact individual and parent plus or direct loans.

  • Do you plan on staying in the home you barely have any equity in, or may be upside down on, and if so for how long?

If the home is more cost than you can keep up with anymore, and you are not in a great equity position, it can make sense to plan that out with your eventual bankruptcy filing in mind so that you can seek relief from real estate related debts through the bankruptcy process.

  • Are you experiencing and immediate medical issues, or do you have any immediate medical needs?

If your health is not stable at the time of filing bankruptcy, it can often be better to delay your filing until you are more stable. But there are times where financial stress can cause, or aggravate existing health concerns.

  • Is chapter 7 going to cause you to liquidate non exempt items that could be sold and the cash used to settle debts for less than what you owe?

How to find a good bankruptcy attorney

It is entirely possible to avoid bankruptcy by negotiating lower payoffs with unsecured creditors. It is also silly for many people to use debt settlement as a way to avoid chapter 7 bankruptcy, both from a cost and lost time basis, and even from a psychological one. But it troubles me how many reports I get from consumers about how the bankruptcy attorney they consulted with never touched on the possibility of settling bills to avoid filing chapter 7, and especially as a way to keep out of chapter 13 repayment plans that are often inflexible and hard to complete.

Unless you’re pulling into bankruptcy court with a financial tank full of fumes (your out of money each month before your out of bills to pay), all of the above leading questions should be assessed by bankruptcy professionals. Your answers to those questions, and several others, may still have you filing chapter 7 bankruptcy, but perhaps on a 6 or 12 month delay, maybe even longer.

You may need legal relief from a wage garnishment, lien, levy, or to prevent a loss of property.  Bankruptcy can provide immediate relief from creditors right away. But unless you are in some type of financial emergency, you likely have time to consider why and when it is best for you to hire the attorney and proceed with bankruptcy.

For many people, finally reaching the decision to simply talk with a bankruptcy attorney was exhausting. As you go about gathering up information about the process, do not rush head long into filing if you do not need to right away. Slow down enough to not only make sure you are making the right choice, but that you are also maximizing the benefits that chapter 7 bankruptcy brings to what I know has already been a very difficult journey. And along that same line of thought, do not allow yourself to be rushed into filing bankruptcy by a bankruptcy professional.

Calling an attorney for bankruptcy help and information.

There is so much more to learn about bankruptcy beyond taking the first step to call or walk into an attorneys office. I will be covering much more about bankruptcy in coming posts.  I will wrap this one up by pointing out some obvious stuff.

  • Do not take for granted that what you read about filing bankruptcy on line (including on my site) is accurate or the complete information you need. There are state specific concerns for bankruptcy, and a host of individualized things about your situation, that need to be discussed with bankruptcy professionals. That means consulting with someone about bankruptcy is important.
  • Calling to consult with an attorney or their staff does not mean you are filing bankruptcy. It means you are gathering information you need. Those consults are going to be confidential, and many are offered at no cost. You can call the hotline I set up for a no cost consultation at 800-939-8357 and choose option 3.
  • You can and should shop around for the attorney you want to hire. Just because you talked to one a month ago and got some helpful information, you are not obligated to hire that attorney. If something rubbed you wrong, they were not personable, or left off many of the types of things I talk about above that are very real concerns for you, I would suggest calling someone else.
  • No cost bankruptcy consultations are common, but can also be relatively brief. Be sure to call back with additional questions that are sure to come up.
  • Some attorneys will accept monthly payment plans when you are filing chapter 7 bankruptcy. They may not file your bankruptcy petition until you have paid their fee and covered courts costs and filing fees, but you can often get relief from debt collector calls and the like once you retain your attorney.
  • There are some low income legal aid offices that provide discounted bankruptcy services to those who qualify.
  • Just because you can squeak through with making payments on your debts each month does not mean you are not a perfect candidate for bankruptcy and a fresh start with your finances. I find people in this category to be some of the best candidates for chapter 7.
  • If you are not being asked personal life and financial outlook types of questions by bankruptcy professionals you speak with (like those I covered above), I would question whether or not they are going to be looking out for your best interests.
  • Don’t let debt relief professionals of any type skew your perception of how to resolve problem debts with talking points about how your credit scores can be hurt, and the damage to your credit reports that can occur. There is a ton of misinformation out there about how chapter 7 bankruptcy kills your credit, or cuts off access to financing. It doesn’t, at least not to the level you may be concerned about.

Credit Reports and Scores – How Debt Resolution Programs Hurt Both

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A common concern you may have when searching for the best way to get out of overwhelming debt is what can happen to your credit score. What follows will help you understand credit score impacts that relate to the most common and legitimate debt solutions. This page will also help to dispel some myths that get regurgitated across the web.

There are far too many misconceptions (and incomplete summaries), about credit reports and the harm that comes from credit counseling, settling debt for less than what you owe, or how bankruptcy will stop you from getting approved for credit.

After more than 20 years of helping people with debt problems, I can say with certainty that there is too much focus on the credit report and credit score when what is being sought is debt relief. Focusing on getting out of debt with the right tools comes first.

Your credit reports and credit score will heal and bounce back given time. And this is true no matter what path you take to resolve your debts. How little time it takes for your credit to bounce back, or to get approved for different types of financing, may surprise you.

Credit scores open doors

Along with the recession came more strict credit risk modeling by lenders. This caused a reduction in lending because more attention is being given to lending criteria other than your Vantage and FICO credit scores.  This means that you’re DTI (Debt to Income ratio), if unhealthy, will prevent you from getting approved for new credit, even if your credit score is excellent. If you have too much outstanding debt, no matter if you have always paid those bills on time, you get declined for new credit.

The same tightened lending criteria is likely to come from the economic upheaval resulting from the COVID-19 pandemic.

Your 720 or higher credit score will be something you can be proud of, but if your credit card debts have you stretched thin from one month to the next, your credit score has lost its utility function.

See the video below to better understand the affect on your credit score by different debt relief solutions, plans, or programs.

Maintaining a good credit score is part of the borrow and spend economy we live in. The message to society is “know your credit score” and “all things are possible with a great credit score“. We now have credit score related commercials that air during prime time television shows and major sporting events. 

Debt relief and your credit score

If you are looking into debt relief programs and landed on this page, chances are you’re reading because you want to know what happens to your credit report and credit score if you use credit counseling, debt settlement, or bankruptcy as a way to resolve debt. That means you are in the least likely position to spend, or to be seeking out new credit products, either right now, or for a couple of years to come.

The three most legitimate debt relief intervention options do indeed impact your credit report and/or credit score. Each method hurts your ability to get new loans, or certain types of loans, and for close to the same amount of time. So stop thinking about your credit score, and start thinking about getting out of debt in the quickest and most affordable way.

If you are concerned about how each different type of debt relief program will work for you now, and still allow you to accomplish credit goals in the future, you will be well prepared after reading this page.

I am going to lay out the credit report, credit score, and access to new credit product impacts from debt relief programs in the order that most of the public perceives as the least confrontational, and end with the “B” word. Each comparison is generalized, but in a way that will help you understand your credit needs for the next 3 years, set beside the debt relief programs you are on this site to learn more about. The comment section at the bottom of this page is a great place to post your questions and concerns and get feedback in order to take the information and apply it to your specific situation right now, but with an eye on your credit future.

Credit counseling hurts your credit report, but not your score

Your previously active credit cards will be updated to show your account was closed by credit grantor (unless they were already closed, or you get proactive and close them yourself prior to consolidating with a credit counseling agency). Recently closed accounts can have a slight impact on your credit score, but typically only a few points.

While enrolled in a credit counseling program it is generally very tough to get financing of virtually any nature in the first 12 months. This is because many creditors will inform the credit reporting agencies that your account with them is part of a consolidated repayment plan. Because credit counseling agencies will normally want to have all or most of your credit card debts enrolled in the plan, this type of reporting could appear several times across your credit report.

Debt management programs with credit counseling companies run on average 4 to 5 years. This can mean you are locked out of new unsecured credit products, like new credit cards, for this entire period of time.

You may be able to get financing on a vehicle or even purchase a home, modify an existing mortgage, or qualify for a student loan (either your own or parental) shortly after enrolling and making on time payments in the debt management plan.

When you complete the debt management plan, and if all other payments were kept current (like an existing mortgage, student loan, car loan), you should find that your credit score stayed in good shape. You will have eliminated most, if not all of your unsecured credit card debt. But you will have also eliminated year’s worth of unsecured credit history, and have no recent unsecured credit activity. Credit “recentness” is one of the better attributes of open and active revolving consumer credit cards being on your credit report. This is one of the simpler aspects of your credit report and credit scoring factors to rebuild. Losing the long credit history when accounts are closed can be rebuilt over time too.

More detailed information about how debt management plans work to help you manage your credit card debt can be found in my credit counseling article series. You can also call and speak with a certified counselor and learn more about how debt consolidation works by calling 888-317-8770.

Settling debt can hurt and help your credit report, and increase the FICO score

Settling your credit card debt for less than you owe requires you to have missed payments. This fact will give many readers pause if you are still making your payments on time. If you are reading this and are already 90 or more days late, and cannot afford a debt consolidation plan with a credit counseling service, you may now realize that your options for debt relief could be limited to bankruptcy or settling debts.

For those readers who have not missed credit card payments yet, but know that you will soon fall behind, missing payments is how you set yourself up to settle later. Just know that this is going to:

  • Cause your credit score to fall significantly
  • Stain your credit report with late pays, potential charge offs, and can lead to later debt collection entries for 7 years.

How debt settlement impacts your credit report and credit score will vary widely from one person’s situation to the next. I have seen credit bounce back quickly with many files that are similar to this college professor I worked with who shared her story with the Detroit Free Press.

Since another major portion of your credit score is factored on repayment history, your credit report and score is going to take a beating. The duration of the credit pain will be different for each person. But once you achieve zero balance reporting, your credit score can begin to improve. How long it will take to improve will depend on several factors.

5 ways your credit bounces back quicker from settling

Improve Credit Score

  1. How long it takes to settle your debts? Settling a credit card debt directly with your bank before the account goes 180 days without payment is ideal.
  2. Did your account get sold to a debt buyer who is now reporting a collection entry on your credit report? This means your original lender reports your debt as a charge off, and the debt collector reports a new entry on top of that.
  3. What accounts were current during the settlement process? Those who settle credit card debts while keeping current with their payments on a mortgage, car loan, and student loans, tend to see their credit bounce back quicker.
  4. Did you have much credit depth before settling debts? Those with paid off home loans, auto leases and loans, paid off credit cards etc., tend to recover faster than someone whose only accounts in their credit profile were the credit cards that got settled.
  5. Were you able to take smart steps to improve your credit along the way? There are indeed ways to cherry pick accounts you settle, or plan your settlement strategy in order to improve your access to new credit products sooner.

In general, when taking into consideration two decades of hands on experiences of working with people to resolve debts by settling balances for less, I see people’s credit score, and access to new credit products, recover in 12 to 18 months. This would be a year and a half after the last account gets settled, and the credit reports are updated to reflect there is no longer any balance owed. By recover, I mean you are in decent credit shape again in order to qualify for home loans, auto leases and loans, and even new credit cards.

I have worked with people who have gotten approved using FHA underwriting on a home loan within a few months of finishing their settlement plan. Who are also able to get funding for student loans, and qualify for new auto financing, after completing settlements. Those who fit many of the 5 bullet items above can reach some credit goals much earlier than would have been the case had they filed chapter 7 bankruptcy, or enrolled with a credit counseling agency.

A key factor for bouncing back from settling debts and accessing new credit comes from a healthier debt to income ratio. Your finances now reflect that you can take on new debt and successfully make payments with your income.

Watch this short video from my Debtbytes channel about what settling debt means to your credit rating and access to new credit products:

How chapter 7 bankruptcy hurts your credit.

Chapter 7 bankruptcy stays on the public record section of your credit report for 10 years. That is the longest shelf life of all debt relief options! But the long negative credit reporting and the initial Olympic ski slope credit score drop is misleading. The perception of chapter 7 bankruptcy is that your credit report and credit score is being sentenced to prison for 10 years. Not true!

There are a host of reasons to look at all of your options to stay out of bankruptcy. Your ability to access new credit soon after your debts are discharged in a chapter 7 is not as legitimate a concern as many would have you believe. If you are struggling under a heavy debt load, and can qualify for chapter 7, it should be viewed as an option of first resort, not the one that should be avoided at all cost. In fact, chapter 7 bankruptcy viewed from a pure cost basis, will beat the cost of debt settlement, and credit counseling, for the vast majority of people.

People discharging debts through chapter 7 bankruptcy find credit card offers in their mail within weeks or months after the bankruptcy is finalized. The credit card offers do not come with high limits, and are going to have higher interest rates attached, but they are there.

Chances are you would not see offers for new credit if you continued struggling your way through your debts, because you are carrying too much of it. Chapter 7 bankruptcy would wipe out your unsecured credit card bills and other debts. For many this will mean a healthier debt to income ratio than you have had for years! There is also the fact that creditors know you cannot file chapter 7 bankruptcy again for 8 years, and consider that an acceptable risk.

Taking on new credit card debts after filing for bankruptcy relief in today’s economy, and with the lower credit limits that will be available, will make it harder to get in debt over your capacity to pay it back.

Credit and loan standards after filing chapter 7 bankruptcy.

  • FHA (Federal Housing Authority) underwriting for new home loans will put qualifying for a new mortgage or home purchase out of reach for a minimum of two years (some exceptions). This means you rent, or stay put for a short time. This certainly blows the 10 year credit report and credit score concern out of the water!
  • Underwriting for student loans you want to cosign for will be out of reach for a few years – not 10.
  • You may be able to get decent auto financing within 12 months after filing for chapter 7 bankruptcy. See how that’s measured in months, and not years?

Filing chapter 7 bankruptcy, and getting a fresh start with your personal finances, is not the end of the road it is made out to be. It can actually be a necessary beginning to a new credit life. You simply need to know how lenders and underwriters view the bankruptcy, and be proactive and smart with rebuilding credit. The 10 year credit report stain is more like a coffee cup smudge within two to three years.

How Chapter 13 Bankruptcy hits your credit score and credit report is another thing entirely.

Chapter 13 is the worst of all debt relief solutions when it comes to credit impacts. The court trustee is going to be overseeing virtually every aspect of your financial life during your repayment plan. Chapter 13 bankruptcy plans go for either 3, or 5 years. The majority are 5 year plans.

Chapter 13 will be on your credit report for 7 years.

The bankruptcy trustee will have to approve and monitor your household budget and expenses for the life of the chapter 13 repayment plan. If you wanted to take on any new credit, no matter what it is for (virtually), you have to get the trustees permission, and that is not very common.

If there is any debt relief solution that is like a jail sentence to your credit, this would be it. There is really no flexibility to a chapter 13 bankruptcy. Historically about 70% of chapter 13 filers cannot, or choose not, to stick it out and complete the repayment.

There are very real benefits to a chapter 13 bankruptcy. You do get the courts protection from creditors who could otherwise use aggressive collection strategies, like suing to collect. You get to keep personal items that may have not been permitted in a chapter 7. Your retirement accounts are nearly always protected. Chapter 13 can even make your home more affordable by helping to cram down a second mortgage if you are underwater.

If you cannot muster up the cash to settle with creditors, or hold too much equity in your home, or have other assets to protect, chapter 13 will make sense. Just not from a future credit planning perspective.

Here is a brief video about bankruptcy and how it can impact your credit:

Your credit reports and scores are a utility for consumption.

Credit reports and credit scores have a utility function for both you and lenders. Banks use your credit rating to price risk. You use your credit score to get better pricing when accessing credit for consumption. If you have a good score and healthy looking credit report, and are in the market for a loan, you are using your credit history and credit rating utility function. The better your credit rating, the lower the costs you will pay for making purchases using credit. Long term this will mean a savings of tens, if not hundreds of thousands of dollars.

Just think about what a percentage point or two on an interest rate tied to a 30 year fixed mortgage can mean to you in savings over the life of the loan!

What if you are not in the market for new loans, or maybe would like to be, but have more debt than you can manage?

I mentioned above that lending in the national economy has gotten tighter. Lending markets have thawed a bit since the credit freeze hit the U.S.  several years ago, but now we are dealing with COVID-19 fall out. Even when the credit markets do fully break out, lending standards like those from 2005 or 2019 may not come back quickly. Applying for a credit card on line and getting a 25k credit limit, with thin employment and credit history, is probably gone for good.

Another example of the new normal are the increasing changes to credit underwriting standards for home loans that will impact most people. The CFPB’s new qualified mortgage rules will now impact your ability to get approved for a new home loan, or refinance an existing loan. I expect there to be student loan underwriting changes in the coming years as well. What does this mean to you?

Your credit report may not have a single blemish. Your credit score may be over 700. But if you are carrying too high a percentage of monthly debt payments compared to your monthly income, your credit rating has lost its utility function. You cannot effectively use that excellent rating without first implementing a strategy to pay off debts and bring your DTI in line with the lending standards being used in the credit market you are interested in.

If you are on this web site and reading through the debt relief program, it likely means you are in an emergency situation with your debt, or you recognize you soon will be. The three options for debt resolution outlined above may be what you have to consider in order to put yourself back on track financially.

Putting aside the hyper messaging in society about the importance of your credit rating; What do you need your credit rating for right now, or over the course of the next 24 months?

If you have a debt problem, your credit rating has lost some or all of its utility function already. The utility function can be returned once the debts you are dealing with have been resolved, or paid down to a point where you’re credit utility returns.

Conclusion:

Credit counseling services, debt settlement programs, and bankruptcy are the 3 main debt intervention options. Each one of them affects your credit score and credit report in different ways. Even slugging it out month to month to pay your bills on time – where your too high debt to income is going to prevent access to new credit – amounts to much the same as the debt relief solutions outlined above.

What may surprise you is that all of these methods for resolving debt track fairly closely with the other when it comes to being able to access new credit products.

Hopefully you are now better prepared to understand that when you are struggling with debts you can no longer afford, but are more concerned with your credit score, your attention is on the wrong thing. Focus on solving your personal debt and budget crisis first. Credit will be available again, and much quicker than you may have thought.

Do not let others sell you on the importance of maintaining credit when you cannot maintain payments on the debt you have. Especially when your debt to income means you are not going to be getting approved for credit – even with a high credit score.

Focus on the debt relief solution that is in line with your current financial ability, but with an eye on your future credit goals and needs in the next two to three years. A good process of elimination is to see if you can pay your debts back using a credit counseling agency and the debt management plan approach. Talking with a credit counselor in order to get an exact quote of how low your monthly credit card payments can be is free. You can also click on the settlement estimate request below; fill that out; and get an email with an estimate of what settlement will look like for you.

If a credit counseling service cannot get your payments to a place where you can afford your credit cards (medical bills etc.), and contrary to the desire of most to avoid bankruptcy, I would next suggest speaking to a bankruptcy attorney about chapter 7 debt discharge. If you cannot qualify for chapter 7 bankruptcy, or learn something about it that would cause you to cross it off the short list of workable debt relief options, then get started reviewing my debt settlement series.

If you have any questions about your specific debt issues, and how solving a debt problem relates to your credit report, credit score, or near term credit goals, post in the comments below for feedback.

Best Debt Relief Solution Options – An Overview

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Because the options available to eliminate problem credit card debt are limited, I often find it more productive to use a process of elimination to help determine what would be the best debt solution. Most readers will find they can narrow down the list of debt solutions to one, or perhaps two, using the same process I have used during one on one consultations for more than a decade.

People tend to have a bias toward a particular debt relief solution, or even contempt toward some of the options available (cough… bankruptcy). Researching and choosing the option that will work for you is not a great place for emotion, or even preconceived notions. There are tens of thousands of websites, and probably more than a few thousand finance writers out there, so no shortage of coverage about debt relief. Most suggest avoiding bankruptcy at all costs, which is just silly. But I cover all of your options below.

There is also an extraordinary number of web sites that raise HUGE concerns about debt settlement, but provide little detail about settling credit card debt, or the benefits. Perhaps they do not know much about it, or are too lazy to cover the topic in the detail needed to inform their readers, or maybe it’s a little of both.

I suggest checking your emotions and biases at the door. The numbers are unemotional and without bias, so I suggest working with your household income and expenses first. Using your current monthly cash flow as a qualifier will help you to eliminate debt relief options you cannot afford.

Along the way, you may recognize that some debt solutions offer you a way to accelerate getting out of debt and moving on with your financial future more quickly.

Calculate Your Debt & Monthly Cash Flow

The following briefly summarizes how to weigh your current income and monthly cash flow and compare your financial ability with legitimate options for debt relief.

Add up all sources of income you have on a monthly, quarterly and yearly basis. Next, add up all of your debts. Include all unsecured debts like credit cards and all secured debts like a mortgage or car payment. You will also want to itemize all monthly expenses such as insurance, utilities, groceries etc. Don’t forget about quarterly and annual expenses such as property taxes. You can use the income and expense sheet I do.

Tip: You cannot fully grasp the best way to resolve your debts until you have completed this math.

When you have completed adding up your bills, separate the monthly payments you may be making toward unsecured accounts (like your credit cards) then add up all other monthly expenses and calculate the total. How does the total amount of monthly expenses without credit cards and other unsecured bills (personal loans, medical bills) stack up next to your monthly income? What amount of money is left over after subtracting your monthly bills from your monthly income (remember – do not include credit card and other unsecured debts)?

Debt vs Cash Flow

The amount of money you have left after all typical necessities are taken care of can be referred to as your debt solution fund. The amount of money in your monthly debt solution fund is what you should start with when evaluating which debt option can best apply to your unique set of current circumstances – weighed beside your personal and family goals over a 2 to 5 year time frame.

Debt Roll Up, Debt Snowball, Debt DISCIPLINE

This debt solution works when you have a dependable and predictable income combined with a disciplined monthly budget and spending outline that you can confidently commit to.

Establish if you can consistently pay 20% over your required monthly minimum payment toward just one of your unsecured debts each and every month. If you can do this consistently while maintaining all of your other monthly obligations then a debt roll-up (sometimes referred to as debt snowball, debt stacking, debt avalanche) approach can work for you. Review the Debt Roll up Report and create a graph similar to the visual chart you see. If you have the monthly cash flow to apply this strategy on debts you are still current with, you may be surprised with how quickly you can pay off all of the credit card debts you list. If this debt solution can work for you, it may motivate you to take the same approach to quickly pay off car loans, student loans, or even a mortgage – once you completely pay off higher interest credit card debts!

There are innovative technology companies that come up with really great online tools to help you in your efforts using a debt roll up strategy. Many have several different ways they can work with you. You can automate your snowball debt solution and simplify the process. Use their smart phone apps and more. Check some out if your finances have not reached a place where debt roll up has to be crossed off the short list of debt solutions.

Credit Card Consolidation Loans for Affordability

This debt management option keeps you in control, and is a non-confrontational approach to help you get out of debt quickly. Credit card debt consolidation works when you are able to qualify for a lower interest loan that is large enough to pay off your higher interest debts like credit cards.

With the credit card consolidation loan comes the benefit of a lower monthly payment and the convenience of sending money to one lender instead of several. Using consolidation as a debt solution to resolve a high debt load is best when you have a dependable source of income and can keep your commitment to pay down debt while not creating new debts.

Consolidating credit card debt into a lower interest loan with a single payment can solve a monthly budget shortfall. This should create a monthly cash surplus that can be used to pay down the consolidation loan quicker. As an alternative to paying the debt down quicker, you can also set aside money in savings so that you can pay cash for unexpected expenses instead of using credit. If your credit card debt consolidation effort does not yield extra cash flow for savings each month, and you resort to using the credit cards again to cover monthly expenses, you may soon find credit card consolidation has only given you a temporary debt solution. You may in fact be reading this after learning this first hand.

Debt Consolidation Through Credit Counseling

You have to be able to qualify for this debt solution option. Not with a decent credit score (your FICO will not matter) and debt-to-income ratio, like when seeking debt consolidation loans. You need to make sure your creditors participate in these repayment plans (most credit card lenders do). It is a method for consolidating credit card debt into one payment through a DMP (debt management plan) traditionally available through a nonprofit credit counseling agency. Run your monthly budget numbers with a certified counselor over the phone and see if this debt solution would work for you.

Will your current cash flow allow you to pay roughly 2% of your current credit card balances monthly? If yes, look into consolidating your bills with a credit counseling agency. You can lower your monthly payments through credit card interest rate reduction. There is a great deal more to learn about debt management plans offered through credit counseling services. Additional information can be found in the related debt consolidation sections in the above menu.

If you would like to speak with a licensed counselor at a nonprofit credit counseling service agency, please call (888) 317-8770. It is a free call and you will walk away with an exact to the penny quote of what your consolidated monthly payment will be for all of your debts in the plan.

Settling Credit Card Debt for Less (Negotiations)

This strategy requires you to save up money and settle your debts (credit cards and personal loans mostly) over a reasonable time frame in order to keep from filing bankruptcy.

Can you accumulate money from monthly cash flow and other resources in order to raise a portion of your current credit card balances over the course of a set period of time? If so, negotiating lower balance pay offs with creditors can work for you. The process of credit card debt settlement is predictable, for the most part. A large portion of this website is dedicated to helping you better understand this particular debt relief option. Debt settlement is not complicated, but it does require you to be informed, and to be a participant in the process. Whether you negotiate the deals yourself, or request professionals to settle credit card and collection accounts for you, take the time to understand this option thoroughly.

Debt settlement candidates are encouraged to begin this process by completely reading all of the debt settlement content. Start with our simple settlement guide, then follow the links and use our search bar tool in the sidebar to further your negotiation education. When finished, you will know that you should try to raise roughly one fourth to half of your debt totals over the shortest amount of time possible.

Debt settlement is the more confrontational approach to debt relief, but it can help you avoid bankruptcy, and the quicker you are able to negotiate and fund settlements, you can completely avoid being sued for collection.

Filing Chapter 7 & Chapter 13 Bankruptcy

This option is regarded as the nuclear debt solution – the last resort. Filing chapter 7 or 13 bankruptcy can help you get freedom from debt and more immediate relief than other options and is legally binding on your creditors:

Can you qualify for chapter 7 bankruptcy given your states income means test?

Many people will look at all other available options before finally contacting an attorney about bankruptcy. Many readers are here because they want to avoid bankruptcy. At the conclusion of your full review of the debt relief options we have laid out for you, you may learn that a chapter 7 bankruptcy provides the most immediate and lowest cost relief from your debt troubles.

You should speak with an attorney that specializes in bankruptcy to learn more about how this option can benefit you. Most bankruptcy attorneys will offer an initial consultation at no cost. In fact, virtually every form of debt solution you look into will have someone available to talk with you about it for free. There is really no excuse for not looking into each debt relief option – that you can afford – by reaching out to professionals.

An uncomplicated chapter 7 bankruptcy can cost between $1,500 and $2,000. Let’s assume your bankruptcy will have a total cost of $1,800 from start to finish. It’s affordable, and if you simply can no longer meet your required monthly minimum payments, or have already missed credit card payments, you will typically focus on debt settlement or bankruptcy as workable debt solutions.

Combining basic math with all that you will learn will put you in the best position to make informed decisions about options for debt relief. I already mentioned that there is a great deal of misinformation and bias about different debt intervention options. But when you distill your current situation down to what you can do vs. what you heard you could or should do, you can better filter out incomplete information and the biases that abound.

The credit score bias to avoiding bankruptcy.

Many will have a concern about debt solutions and the credit report and score impacts of each. You may be wondering how long it will be before you can access fairly priced credit products again.

Combining credit reporting and scoring concerns with your current financial abilities (the math) may cause some readers to rule out bankruptcy. But once you understand the cost benefit of bankruptcy and dispel some of the myths about how different debt relief strategies affect your credit, you may find chapter 7 bankruptcy to be a mathematical winner.

You may also learn that bankruptcy would actually provide you access to fairly priced credit products in a time frame consistent with your goals, and sooner than using either a credit counseling service, or by settling your credit card debt.

Doing Nothing About Your Credit Card Debt

If you’re not paying debts now, or soon will not be able to, doing nothing at the moment can be a temporary and necessary part of your debt solution plan.

Not being able to come up with a realistic and workable plan to tackle debt is not that uncommon. There are many situations where doing nothing for a few months, while you wait for your situation to stabilize, will make perfect sense. Doing nothing is not a debt solution, but can often be better than committing to a debt relief path now, only to be forced to leave it for another in the near future.

Two examples where doing nothing with your credit card debt at the moment could make sense:

  1. You were laid off or lost a job, and are currently looking for work. If you return to work soon, you would be able to qualify for credit counseling or have the ability to accumulate money to settle debts that went unpaid while you were unemployed.
  2. Your medical concerns have created large debt. Your condition has not fully stabilized, which may mean the full extent of the medical bills is not yet known.

Solutions for debt relief can be simple and straight forward. Some solutions require you to meet a set of qualifications. Other debt solution methods give you flexibility. There are non-confrontational approaches, and ways to get out of debt quicker that require more of your personal participation. Our website provides detailed information and resources for evaluating and assisting you with all of the above debt solutions.

What to do When Struggling or Late with Credit Card Payments

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I generally begin any debt relief consultation I do with people who reach out to my company in search of help with credit card debt with this question:

“What has you reaching out to a perfect stranger? What is going on with you financially”? Then, I shut up and listen. I am sometimes the first person the caller has ever spoken to about the situation they are in.

The responses I hear vary, as does the time someone will take to outline the details of their hardship. By listening closely, I am able to hear the stress and fear they have about their credit card debt. I often hear the struggles they have gone through to try and keep current with credit card bills, or the difficulty they have had in communicating with creditors and collectors.

The other day, I heard one of the simplest and shortest answers to my initial question that I have had to date.

“My Debt Is Crippling Me.”

While this response does not provide details I generally look to key off of in order to identify the debt pieces or solutions to putting the person’s financial puzzle back together, it said a great deal in a very powerful way.

Struggles with debt and credit can feel crippling.

Overwhelming debt debilitates in the same sense that someone with a physical disability is forced to deal with every day of their lives. The stress and fear with credit card debt problems can often manifest into actual maladies. The worry and frustration about bills, and the lack of money, carries over from one day to the next. What am I going to do at the end of the month when these other bills are due? When will I ever be out of credit card debt? How did I get trapped in a home now worth far less than I owe? What if I get laid off with no savings? How would I get by with maxed out credit cards and no income?

One of the overwhelming benefits to people we talk with is that we can reduce, or even remove the stress and fear they have about their debt problem in one phone call. How do we do that?

For most debt problems, there is a debt relief solution.

This gentleman did not feel crippled when we finished talking about his problem because I plainly laid out the facts of his finances (after several additional questions to be sure), and was able to point out to him the mathematical rational solution to his debt. His solution did not involve needing to engage my company for a product or service, as he was past the point of debt settlement or a creditor sponsored hardship plan being a viable option.

He learned that, unlike someone who has a physical disability for the rest of their life, his crippling debt could actually be cured and with little fuss or expense. He was not at all excited to know that his only real option was to file for chapter 7 bankruptcy, but he saw the wisdom in doing so and hung up the phone with no fear and less stress.

I asked him before we hung up from the call “How crippling is your debt now?”.
He replied “Not at all.”

5 debt management tools that can provide a solution.

There is nearly always an answer to recover from debt. The answers do often involve tough choices and some action steps that are not exactly a thrill to take, but can be arrived at through the process of elimination. Generally, I can walk through the following things and eliminate 3 or 4 out of the 5:

  1. Monthly payment concessions through hardship plans.
  2. Debt Management Plans through a credit counseling service.
  3. Bankruptcy.
  4. Debt Settlement.
  5. Doing nothing (sometimes the right thing for brief period – couple months).

Knowledge removes the fear of the unknown, and unemotional, boring, old arithmetic is the compass to find your way to healthier finances.

My advice to anyone feeling crippled by credit card and other debt boils down to the “Four Gets”:

  1. Get real about your finances;
  2. Get informed about your debt relief options;
  3. Get a plan in place; and
  4. Get started

Settling Your Credit Card with Capital One and Credit Reporting

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My experience working with financially-challenged consumers and their creditors nationwide since the economic downturn reflects that virtually every national issuer of credit cards, even larger regional credit unions, have gone as far as they can to assist their struggling account holders. Capital One is an exception to this. How Capital One goes about settling a debt with you, their treatment of credit reporting after agreeing to reduce your balance, and the fact that they are the most likely to sue for collection, all combine for one huge exercise in caution and awareness.

Credit card issuers offer plans to reduce interest rates on credit cards through hardship plans, debt management plans, credit counseling plans, or offer balance concessions through debt settlement, which go a long way in helping their customers avoid bankruptcy. In this way (credit card payment concessions), Capital One is not all that different from other credit card banks.

Capital One, in my experience, is often tougher to work with.

Banks who are paying attention know that working out some type of arrangement with account holders, who will otherwise be forced into filing chapter 7 or 13 bankruptcy, is in their best interest. Creditors will generally offer fair concessions as a final option because they will lose the least. For more about this see: Banks Choose to lose the least.

I am not sure Capital One is paying attention.

Capital One is quick to use the courts in order to collect on delinquent accounts. They would apparently rather their account holders file bankruptcy.

I continue to encourage seeking bankruptcy protection if your debt is mainly with Capital One.

Now we have Capital One choosing to be spiteful, and perhaps illegally, with those few credit card holders they may offer fair concessions to. To see the collection letter referred to below in its entirety: Capital One Collection Letter

The coupon for $50.00 you will see in the collection letter linked above is not all that new a twist to get a delinquent CapOne credit card member to call MRS Associates (a debt collector). It is worth noting however, it is only a collection ploy and nowhere near worth taking advantage of the perceived “FREE STUFF”. The main problem I want to draw your attention and provide awareness to, is number 9 on page 2 of the collection letter.

9.  Credit Reporting of Your Settled Account. If your Account is settled before it is charged off, the remainder of your Account balance will be charged off. We will then report your Account to credit reporting agencies as settled with an outstanding balance.

Capital One Debt SettlementFair Credit Reporting Act (FCRA) and the requirement to report only complete and accurate information to the Credit Reporting Agencies (CRA’s)? This would FALSELY characterize the trade line and SKEW any later debt to income and/or utilization formula rendering them inaccurate as well. This means that Capital One could be causing consumer’s damages post debt settlement, when they are applying for future loan products whose interest rates and even approval will be factored on a credit report that contains erroneous and false information.

Reporting a balance still due and owing when it has been forgiven would falsely characterize this trade line in your credit report. How do we know the unpaid portion of the settlement is forgiven? Let’s look to number 8 on page 2 of Capital Ones collection letter:

8.  IRS Reporting of Debt Forgiveness. If we cancel or forgive $600 or more of principal on a debt you owe, we must provide a 1099-C tax form to you and the IRS. Please consult your tax advisor and the instructions accompanying your tax forms for more information.

How can number 8, indicating the required reporting of forgiven debt to the IRS, comport with erroneously reporting an outstanding balance when it has:

  • Been forgiven
  • Been settled for a lesser amount agreed to by both parties, thereby leaving no “outstanding” balance

How is Capital One NOT violating the FCRA when they report your debt after settling?

Remember the marauding Viking themed commercials that Capital One ran for many years on television? Here they are wreaking havoc through the lives of real people, NOT ACTORS!

If you have a Capital One story to share, especially as it relates to improper credit reporting, I invite implore you to share it in the comment section below.

Update: Since publishing the above Capital One article about credit reporting and settling Cap One credit cards a couple years ago, some softening of options available to account holders who fall behind has occurred. We do still see the poor credit reporting policy on settled accounts with Capital One, but have also seen how that is getting addressed using disputes with the credit bureaus. If you are serious about resolving unpaid credit card debt with Capital One and have other credit card debts to resolve, it is important to prioritize accounts and target the best savings with the available money you have and can project saving up in the short term. If you have an experience with Capital One collections, credit reporting, or lawsuits, please share in the comments below. If you have questions about how to handle debts with Capital One, post in the comments for feedback.

Considering Bankruptcy – Is Debt Settlement Right For Me?

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A well balanced article by Sandra Block in this morning’s USA Today – “Thinking of debt settlement? New FTC rule can help”, contained some great tips and information for consumers looking into debt settlement as a way to avoid bankruptcy.

For the past many years (and through 10/27/10), Debt Settlement service providers have, in large part, been able to charge fees, whether they were helpful to consumers or not. With new rules issued by the FTC, companies offering settlement services will now have to earn their keep in all 50 states.

There are many attributes to the new rules that will benefit consumers looking for reputable and honest companies to assist them. I will cover many of these consumer protections, in detail, throughout the next several weeks, here on DebtBytes.

I want to expand on Block’s article where she quoted me from an earlier interview, saying:

‘Michael Bovee, founder and president of Consumer Recovery Network, a debt-settlement firm that doesn’t charge upfront fees, agrees. Many consumers who have signed up for debt settlement in recent years should have filed for Chapter 7 bankruptcy’, he says.

I meant what I said in this quote. It is as applicable looking forward as it is in the looking backward context delivered above.

Family Struggles: Get out of Debt

Nobody wants to file for bankruptcy.

The debt settlement industry has been able to leverage this fact exceedingly well with over hyped and over the top claims that debt settlement is a panacea to the debt woes of middle class America. What the FTC found through the 2 year process of crafting these new rules, and from their own enforcement actions, as well as those by state regulators is; AT BEST, Debt Settlement has only worked for roughly 1/3rd of the people who try it. Some sham companies that have been shut down were shown to have only been successful with less than 5% of their client base!

Debt Settlement marketing has been designed to enroll the wrong people, along with the right people, because the fee model used by most companies allowed them to get paid, regardless if they delivered on their claims or not.

The FTC rule changes will chase away many of the “fee grab” marketers from the industry, as they will not be able to “sell” settlement as some easy, soft, “just send this less painful amount of money to a set aside account monthly and we will handle the rest” approach. They will be unwilling to wait to get paid their commissions from people they sign up who cannot fund settlements for sometimes 6 and more months (or at all).

WARNING: The soft sell of debt settlement, even with all of the new disclosures and the upfront fee ban, will still persist after all of the FTC rules take effect.

It may take a while for companies to realize they are shooting themselves in the foot by accepting clients who are ill suited to try to avoid bankruptcy through a debt settlement (often referred to as debt consolidation & debt negotiation) program. So, consumers are still going to have to be thinking through the math to see if they should try debt settlement. It is always the math that should determine whether settlement is right for you. Math & Timing… Math & Timing… If these two things do not sync, given your current finances, debt settlement is NOT right for you!

“Debt Settlement – The Math & Timing” will be Thursday’s post her on DebtBytes. Don’t miss it!

Be Careful! It’s still a jungle out there.

Can Settling your Debts make it Easier to Find a Good Job in Today’s Tough Job Market?

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In a recent blog post written by Diane Stafford with the Kansas City Star entitled: Bankruptcy filing thwarts re-employment, Stafford highlights a key reason why consumers who can qualify for a Chapter 7 liquidation of debt bankruptcy should research ways to avoid it, if at all possible. The concern here is your credit report when you are a job seeker.

One of the primary benefits of filing for Chapter 7 bankruptcy is that your unsecured debt, like credit card debt, gets discharged or wiped out, which gives you the financial fresh start you need if you are strapped with too much debt. However, as Stafford points out, not only will your bankruptcy be part of the public record and noted in your credit report for 10 years, but in today’s job market having that information in your credit file can make it much more difficult to find a well-paying job. That’s because there is a lot more competition for good jobs and so many employers are using other criteria besides an applicant’s resume and references to help them decide who is the “best” person for the position they want to fill. In many instances, one of those criteria is whether an applicant has filed for bankruptcy. The theory is that if an applicant can’t manage her own money, then she probably has bad judgment and would not make a good employee. Of course, as Stafford points out, this attitude does not take into account why an applicant filed for bankruptcy. For example, the applicant may have an ex-spouse who is not paying her the child support she is legally entitled to or the applicant’s health insurer is refusing to pay many of the medical bills associated with his wife’s serious illness.

Therefore, professionals who have been downsized or are concerned that they may lose their jobs should recognize how easy it is to hit the debt wall when they are out of work and should take aggressive steps to address their debt. Although filing for bankruptcy is an option to consider, they should also consider other alternatives, like debt negotiation. Debt negotiation has proven to be an effective option for credit relief and can prevent a bankruptcy from appearing on your credit report.

Settling credit card debts to prevent bankruptcy while seeking a job.

Debt negotiation involves contacting your creditors, such as the banks that issued you credit cards, to try to reach a compromise with them regarding how much money you’ll have to pay to pay off your accounts. Your goal during your negotiations is to get each of your creditors to agree to take less than the outstanding balance that you owe and for the amounts that that they agree to accept to be amounts you can afford. These negotiations are typically predicated on your having missed several consecutive payments on your accounts and on your ability to establish that a hardship — like a job loss — has made it impossible for you to pay your outstanding balances.

Until recently, large creditors, especially banks that issue credit cards, have had long-standing policies regarding when they will offer a settlement to a consumer and when they will consider a settlement that a consumer offers to them. Now however, given the current state of our economy, the troubles within the banking sector, the financial industry’s new focus on risk aversion, and increases in account charge off percentages, many banks have not only become more willing to settle credit card debts, but they are also willing to settle for less money than they would have agreed to in the past. This is good news for debt stressed consumers.

Financial optimism in the face money challenges.

In her blog, Stafford mentions the plight of one professional who might have been able to avoid bankruptcy if he had pursued debt settlement after he lost his job. She writes: “I heard from a professional who lost his job in a March 2008 downsizing at Sprint and began a so-far fruitless job search. His severance ran out, he and his wife depleted three 401(k) savings accounts and used up other savings. They pinched all the pennies they could and are trying to keep their home through a Fannie Mae Loan Modification program.”

The plight of that individual sounds very similar to stories I hear all too often. After losing a job, or experiencing a cut in pay, consumers are optimistic that things will work out for them and so while they are looking for work, they use up their savings and draw down the money in their 401(k)s so they can pay their living expenses and their debts. However, once their money runs out and they are still jobless, many of these consumers end up in bankruptcy. Although I am not criticizing the optimism of these consumers — they need it to help them get through the tough times ahead — I am suggesting that many of them might have made better use of the money in their savings and retirement accounts by using it to settle with their creditors. That way they could have avoided bankruptcy and possibly made it easier to find new well-paying jobs.

Although there always has been and always will be consumers who will benefit more from a Chapter 7 than from negotiating their debts, the fact is that many debt-stressed consumers who do file were actually excellent candidates for debt settlement.