Bankruptcy is not the problem; it is the solution to the problem

      On most days I get a call inquiring about bankruptcy that starts like this: 

      Caller: I don’t know what to do.  I just received a summons for a credit card that I owe money on.  I have been paying a company to deal with creditors.  They told me not to pay my bills.  I have been sending this company money for months.  Now after sending them several thousand dollars, I am being sued!  Can you help me? 

      Unfortunately, this type of situation is really common.  Many people, when they get into debt turn to these companies that promise to negotiate with their creditors to reduce their debts.  The truth they won’t tell you is the following:    

  1. Many creditors won’t negotiate a settlement.
  2. If a creditor agrees to a settlement, they may want a lump sum payment.
  3. If a creditor agrees to a settlement and payment plan, once the debt is paid as agreed, if a debt of $600 or more was forgiven, they will send you a form1099-C.  That means that they will report the forgiven debt to the IRS as unearned income.  You will be responsible for payment of income taxes on that amount
  4. The company that you are sending payments to collect their generous fees up front.  That means that no money goes to your creditors until you pay them their fee.

     After asking the caller questions to see if they qualify for chapter 7 bankruptcy, which almost always they do, I provide the following advice:  

  1. Call the company that you’re using to say that you want to stop using their services and you want a refund of any money that they are holding.
  2. Tell the company that they should stop withdrawing money from your bank account.
  3. Since I don’t trust that the company will stop withdrawing money from the caller’s bank account, I advise the caller to go to their bank to close their bank account and open a new account.
  4. I also advise the caller to make sure that all direct deposits are redirected to the new bank account.
  5. I recommend that the caller retain our office for chapter 7 bankruptcy.  It is important to file bankruptcy as soon as possible so that the creditor suing doesn’t get a judgment and garnish the caller or freeze their bank account.
  6. I explain that once I file the bankruptcy petition, under the bankruptcy law, the creditors can’t proceed with their collection actions.  Further, we would deal directly with the creditors.

     At this point the caller sounds relieved, however they often ask, if I file bankruptcy will this stay on my credit report for 10 years?  Will it ruin my credit?  

     My response is: Your credit is already bad, filing bankruptcy won't make it worst.  In fact, often your credit score will go up by about 100 points within a year of filing bankruptcy. Although bankruptcy stays on your credit report for 10 years, that often is not important.  If you are working and have income, it is easy to rebuild your credit.    That is because you won’t owe any money on those credit cards anymore.  Furthermore, since you are not allowed to file another chapter 7 bankruptcy for 8 years, creditors will be glad to give you credit again quickly.  In fact, if you have sufficient income and have saved enough money for a down payment, you should be able to qualify for a mortgage after 3 years.   

       Over the 40 years that I have practiced bankruptcy law; I have had many clients thank me years later for turning their financial lives around.  I have also represented many of them at closings on their new homes.  

      Bankruptcy is not the problem; it is the solution to the problem.