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Non-Bankruptcy Options

People facing debt crisis are flooded with options on TV, radio and print on how to handle their debt issues, and the choices can be confusing. Unfortunately, those in debt can least afford to make the wrong decision, and may be more vulnerable to unscrupulous sales people. This page summarizes six non-bankruptcy options: the ostrich approach, debt settlement plans, the turtle approach, workouts, budgeting and credit counseling and debt management plans. We have organized these strategies from what we view as least effective, which are addressed first in this list, to most potent and effective, addressed at the end of the list.

Two of the most common bankruptcy related options are Chapters 13 and Chapter 7. Learn about those options here »

The “Ostrich” approach

The least effective of all strategies is to stick your head in the sand and ignore the problem. The dilemma is that this is exactly what most people feel like doing when they are faced with a situation they think is beyond their control. This seems to affect married people more than single people, as singles tend to have more flexibility to quickly change their financial circumstances by downsizing their housing or transportation, quickly identifying budget cuts, or securing new employment. Different ideas about money, credit and debt issues, and different levels of debt tolerance add stress to a relationship, often leading one or both spouses to feel paralyzed when debt issues become overwhelming. Getting into marital counseling and budget counseling immediately to identify your differences in thinking, and to create some common goals is perhaps the best counter-attack.

There is no “right” or “wrong” way to view debt. Some people are very content living with a high debt load (e.g. farmers), while others cannot sleep at night if they carry a small credit card balance from month to month. Finding common financial goals is an excellent way to motivate both spouses to conform their spending habits in a teamwork approach despite differences in debt tolerance. This office is not qualified to provide this sort of marital or debt counseling, but we would be happy to meet with you to go over your issues, and make recommendations of some well-respected counseling resources.

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Debt Settlement Plans

(CAUTION: AVOID AT ALL COSTS !!!) We debated putting this one first on our list, because not only is it not effective, but it can be harmful. These are the companies you see on TV and hear on the radio with toll free numbers to call, advertising that you should take advantage of the “limited-time credit card bailout era” and other deceptive claims. Many of these companies are fraudulent, and seem to be beyond the reach of the law, as they disband and start up new shell companies whenever they start receiving pressure from consumer advocacy groups. There may be a few qualified and successful debt settlement companies, and periodically we hear a success story where a debt is settled, but usually not all debt is settled, leaving the debtor with no other option BUT to file bankruptcy.

(These companies should not be confused with the highly reputable credit counseling and debt management plan companies that you might find locally here in Iowa, which I refer to later in this list under “Credit Counseling” and “Debt Management Plans.”)

In a debt settlement plan, the company will ask you to pay a start up fee, then ask you to deposit a sizable amount of money into its escrow account each month. Once the escrow account has several thousand dollars in it, they will contact one of your creditors and offer a 40% – 75% settlement on your debt with that creditor. If the creditor accepts the offer, the company pays the escrow money to the creditor, and takes a percentage of the escrow for themselves for settling the debt. There are two problems with this approach. First, by the time the debt settlement company has paid all of your creditors in this fashion, the accruing interest on the credit cards plus the fee that the debt settlement company charges for their service results in the debtor paying nearly 100% of the original debt. (And that is for the small percentage of debt settlement plans that actually work !!).

The second, and more common problem, is that while you are waiting for your escrow account to get large enough to make the settlement offers, the creditors at the end of the list who are not receiving payments or offers to settle become impatient and sue you, obtaining judgments. Then they garnish 25% of your wages, and wipe out your bank accounts, meaning you have no money to pay to the debt settlement company, and you have no choice but to file bankruptcy. Meanwhile, you have lost thousands of dollars in payments to the debt settlement company in start up fees, commissions, and escrow deposits, with nothing to show for it but a horrible credit score, judgments, and a looming bankruptcy, not to mention the stress and embarrassment of getting sued and served by the sheriff with papers.

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The “Turtle” Approach

This is where the debtor positions his finances in such a way that he or she becomes “judgment proof,” meaning that creditors have no way to extract money or assets from the debtor through any legal means. The debtor, in essence, buries himself in his protective shell, and lets the creditors fire away at him. This takes incredibly thick skin, and a high tolerance for conflict and aggressive collectors. Our office can help position clients in a manner to become judgment proof, and we can help provide you with strategies to immune yourself if you wish to take this approach. While most do not have the stomach for this approach, it can be effective for the right person and personality type.

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Workouts

This approach uses the leverage a debtor might gain by threatening to file bankruptcy, and making herself judgment proof, then approaching each creditor individually with a deal that will reduce the amount paid to an amount the debtor can afford. The down side is that this approach is more expensive in legal fees than any of the other approaches, and it takes a very competent bankruptcy and commercial transactions team to put a good workout plan together and put it into effect. Often if a debtor has access to cash or financing, it can be quite effective. Installment workout plans are less effective the longer the repayment period. Creditors are sometimes willing to take a substantial discount if they can have their money quickly, even at deeply discounted rates.

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Budgeting and Credit Counseling

This option is perhaps the most difficult, and requires the most work, but it can also be the most rewarding. There are many excellent resources we can point you toward if you want to pursue budget counseling, and endeavor to create a balanced budget where you live within your means going forward, while paying off your past debt. Even if you elect a bankruptcy option, doing this work of learning how to budget will be essential to help you avoid the same decisions that lead to your current financial situation. This may actually be a two-pronged approach: budget counseling (where you gain the skills and tools to budget effectively) in conjunction with personal counseling or marital counseling if there are personal or marital issues that are contributing to your budget problems. Living a balanced lifestyle impacts all areas of your life, including finances, and achieving balance may be the first step to effective budgeting.

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Debt Management Plans

There are local companies in Iowa that are very reputable and highly skilled and trained at setting up repayment plans with your creditors where your interest rates are reduced, and you pay a set amount each month. The monthly fees you pay to these companies are very low, which means that a very high percentage of what you pay into the plan goes toward lowering your debt. Debt management companies strive to put you in a plan that will eliminate, or greatly reduce your debt, within five years. One draw back to this option is that creditors are not forced to adhere to the plans that the company proposes, and a stray creditor could still sue you, get a judgment, garnish your wages, levy your bank accounts, and destroy the plan. However, that scenario is much less likely in these plans where all creditors are receiving something every month, contrary to debt settlement plans where all but one creditor is ignored.

How long will it take to repay my debt? Try our debt repayment calculator to explore your possible debt repayment scenarios.

Another draw back some of these approaches (Budgeting, Credit Counseling and Debt Management Plans) is that it may take too long to repay the debt. For example, if you have $50,000 of debt and you pay $500 per month toward it at 7%, it would take you 12.5 years to repay the debt. At 12%, you would never repay the debt because the monthly interest exceeds $500. Using our Debt Repayment Calculator, you can determine how long it would take to pay off your unsecured debt.

If you have too much debt compared to your income, then Chapter 13 or Chapter 7 bankruptcy will be your only options. Learn more about Chapter 13 and Chapter 7 bankruptcy here.

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