October 17, 2005
As Bankruptcy gets Tougher, Choose Alternatives with are
Debt-laden consumers will find shelter harder to come by as tougher bankruptcy rules take effect. But alternatives are few and scammers who prey on financially strapped borrowers abound.
People with serious money problems who don't want to declare bankruptcy typically go one of three routes: They try to negotiate with creditors, use a credit-counseling agency, or work with a so-called debt-settlement company. Because there are drawbacks to all three, consumers need to choose with care.
Both the debt-settlement (also called debt negotiation) and credit-counseling industries harbor bad operators who make exorbitant promises to consumers, charge steep fees and offer little in the way of results. Finding a legitimate operator takes some investigation.
And dealing directly with creditors can yield widely variable results. Someone with high debt on many credit cards will likely be less successful than someone struggling with one or two cards.
"They have changed the bankruptcy rules but they have not changed any of the underlying reasons why people file bankruptcy in the first place," said John Ventura, a bankruptcy attorney in Houston and author of "The Bankruptcy Kit," adding that his clients often face medical hardship or job loss.
For most, the first stop will be a credit counselor. The new bankruptcy law requires consumers complete a credit-counseling course with an approved agency when filing for bankruptcy. Even if you're not planning to file, consumer experts suggest seeking aid from an approved agency.
"If there's a possibility that you're going to have to file bankruptcy, you're better off going to the agency that's already been approved" to provide the necessary certificate, Ventura said.
A preliminary list of approved agencies is on the Justice Department's U.S. Trustees site at www.usdoj.gov/ust/. Click on "credit counseling and debtor education" and then on "approved credit counseling agencies." Visit the site.
When seeking aid from a credit-counseling agency, make sure counselors aren't paid commissions for putting people into debt-management plans and avoid agencies that charge steep up-front fees for, say, education pamphlets.
Also, make sure counselors discuss your overall debt picture. If, for instance, they don't consider your mortgage payment, you may find yourself struggling to afford the debt plan.
Debt settlement
Because counseling plans usually require consumers to pay back the full balance, debt settlement -- with lower monthly payments as consumers pay a portion of what they owe -- may work better for those at the end of their financial rope. Consumers stop paying creditors and instead put money aside each month for one final, lump-sum payment. The settlement firm negotiates with credit-card issuers so consumers can pay a percentage of the debt, often 40% to 50%.
While in the program, credit-card fees and interest accrue, and the consumer's credit rating deteriorates fast. And creditors and collection agents may keep calling. For that reason, people with unsullied credit records should stick to credit-counseling plans, which are less likely to hurt credit ratings.
If your debt-settlement program takes too long, there's a chance creditors will sue you before you're done. Remember, this isn't like credit counseling, which creditors fully support. The debt settler just tells the consumer to stop paying bills (because that's likely to make the creditor more flexible) and then tries to agree with the creditor on how much debt must be paid. Talks can take years. Impatient lenders may sue.
Despite the seemingly easier terms of debt settlement, not all companies fulfill the promises they make. And because the amount of debt owed rises as consumers save for the settlement, some consumer advocates say steer clear.
"It makes it very hard for people on a tight budget to save enough money to settle multiple debts," says Deanne Loonin, staff attorney at the National Consumer Law Center, in Boston, who wrote a report in March criticizing debt-settlement companies.
Reputable firms do exist, experts and bankruptcy lawyers say. "There are some debt-settlement companies that are really trying to help consumers avoid bankruptcy," said Gerri Detweiler, author of the "Ultimate Credit Handbook" and operator of DebtConsolidationRx.com, a consumer advice site. "The good ones are harder to find."
But first "talk to a reputable nonprofit credit-counseling agency. That's going to be your best bet if you can afford the monthly payment," she says.
While the credit-counseling industry has a rosier reputation (this is just not true. As a matter of fact it has a worst reputation. However, most banking companies will have you believe this as it is in thier interests), some agencies have come under fire recently for pushing consumers onto inappropriate debt-management plans and charging exorbitant fees without providing the education required by their nonprofit status.
Also, most credit-counseling organizations are funded by contributions from creditors. Some industry observers argue the agencies are more beholden to credit-card issuers than consumers.
Still, consumers may find debt settlement and credit counseling more appealing under the new bankruptcy law, as it's likely fewer filers will be eligible to write off their debts under Chapter 7, and more will be forced into repayment plans under Chapter 13.
"It's going to be harder to file a Chapter 7," said Alan Kopit, a legal editor at Lawyers.com and bankruptcy attorney in Cleveland. "If they can't solve their problems through bankruptcy, they're going to try whatever they can try, which will be [some form of] debt consolidation."
Consumers have been rushing to file before the law changes: Personal filings are up 19.4% year to date through Oct. 8, versus the same period a year ago. More than 102,000 people filed in the week ending Oct. 7, a record high and an average of more than 20,000 filings per weekday, according to Lundquist Consulting in Burlingame, Calif.
Vet any program
Obviously, cost is a key factor. Some companies charge as much as 30% of debt owed. Debt Settlement USA charges 12% of the amount of money owed when you enroll, spread out over 10 months, so if you owe $10,000, you pay $120 a month for 10 months.
Freedom Financial Network offers two payment plans: 25% of the amount the company saves you (based on balance owed at enrollment), paid each time the company settles with a creditor, or 15% of the balance owed, paid each month the customer is enrolled.
Be wary of plans lasting longer than three years. "When they stretch out beyond 36 or 48 months, that's very risky for the client. At that point, some creditors are going to want to sue," Detweiler says.
Also, a good settlement company will warn you about possible tax consequences: Consumers sometimes owe income tax on forgiven debt. There are exceptions. For instance, if your debts exceed your assets at the time of settlement, you likely won't owe tax.
For more information on the tax consequences, consult a tax expert. Or, find Publication 908 on the IRS Web site at www.irs.gov. Look for the "debt cancellation" section.
With any debt-solution program, check with the Better Business Bureau and your state attorney general's office to see whether consumers have complained about the firm.
Go to www.naag.org and click on "find your attorney general." You can search companies' names through the Better Business Bureau at www.bbb.org (see the box at the top of the page that says "check it out").
For more information on debt plans and a list of questions to ask when choosing a credit counselor, visit the FTC Web site at http://www.ftc.gov/bcp/conline/pubs/credit/debt.htm.
Andrea Coombes is a reporter for MarketWatch in San Francisco.
People with serious money problems who don't want to declare bankruptcy typically go one of three routes: They try to negotiate with creditors, use a credit-counseling agency, or work with a so-called debt-settlement company. Because there are drawbacks to all three, consumers need to choose with care.
Both the debt-settlement (also called debt negotiation) and credit-counseling industries harbor bad operators who make exorbitant promises to consumers, charge steep fees and offer little in the way of results. Finding a legitimate operator takes some investigation.
And dealing directly with creditors can yield widely variable results. Someone with high debt on many credit cards will likely be less successful than someone struggling with one or two cards.
"They have changed the bankruptcy rules but they have not changed any of the underlying reasons why people file bankruptcy in the first place," said John Ventura, a bankruptcy attorney in Houston and author of "The Bankruptcy Kit," adding that his clients often face medical hardship or job loss.
For most, the first stop will be a credit counselor. The new bankruptcy law requires consumers complete a credit-counseling course with an approved agency when filing for bankruptcy. Even if you're not planning to file, consumer experts suggest seeking aid from an approved agency.
"If there's a possibility that you're going to have to file bankruptcy, you're better off going to the agency that's already been approved" to provide the necessary certificate, Ventura said.
A preliminary list of approved agencies is on the Justice Department's U.S. Trustees site at www.usdoj.gov/ust/. Click on "credit counseling and debtor education" and then on "approved credit counseling agencies." Visit the site.
When seeking aid from a credit-counseling agency, make sure counselors aren't paid commissions for putting people into debt-management plans and avoid agencies that charge steep up-front fees for, say, education pamphlets.
Also, make sure counselors discuss your overall debt picture. If, for instance, they don't consider your mortgage payment, you may find yourself struggling to afford the debt plan.
Debt settlement
Because counseling plans usually require consumers to pay back the full balance, debt settlement -- with lower monthly payments as consumers pay a portion of what they owe -- may work better for those at the end of their financial rope. Consumers stop paying creditors and instead put money aside each month for one final, lump-sum payment. The settlement firm negotiates with credit-card issuers so consumers can pay a percentage of the debt, often 40% to 50%.
While in the program, credit-card fees and interest accrue, and the consumer's credit rating deteriorates fast. And creditors and collection agents may keep calling. For that reason, people with unsullied credit records should stick to credit-counseling plans, which are less likely to hurt credit ratings.
If your debt-settlement program takes too long, there's a chance creditors will sue you before you're done. Remember, this isn't like credit counseling, which creditors fully support. The debt settler just tells the consumer to stop paying bills (because that's likely to make the creditor more flexible) and then tries to agree with the creditor on how much debt must be paid. Talks can take years. Impatient lenders may sue.
Despite the seemingly easier terms of debt settlement, not all companies fulfill the promises they make. And because the amount of debt owed rises as consumers save for the settlement, some consumer advocates say steer clear.
"It makes it very hard for people on a tight budget to save enough money to settle multiple debts," says Deanne Loonin, staff attorney at the National Consumer Law Center, in Boston, who wrote a report in March criticizing debt-settlement companies.
Reputable firms do exist, experts and bankruptcy lawyers say. "There are some debt-settlement companies that are really trying to help consumers avoid bankruptcy," said Gerri Detweiler, author of the "Ultimate Credit Handbook" and operator of DebtConsolidationRx.com, a consumer advice site. "The good ones are harder to find."
But first "talk to a reputable nonprofit credit-counseling agency. That's going to be your best bet if you can afford the monthly payment," she says.
While the credit-counseling industry has a rosier reputation (this is just not true. As a matter of fact it has a worst reputation. However, most banking companies will have you believe this as it is in thier interests), some agencies have come under fire recently for pushing consumers onto inappropriate debt-management plans and charging exorbitant fees without providing the education required by their nonprofit status.
Also, most credit-counseling organizations are funded by contributions from creditors. Some industry observers argue the agencies are more beholden to credit-card issuers than consumers.
Still, consumers may find debt settlement and credit counseling more appealing under the new bankruptcy law, as it's likely fewer filers will be eligible to write off their debts under Chapter 7, and more will be forced into repayment plans under Chapter 13.
"It's going to be harder to file a Chapter 7," said Alan Kopit, a legal editor at Lawyers.com and bankruptcy attorney in Cleveland. "If they can't solve their problems through bankruptcy, they're going to try whatever they can try, which will be [some form of] debt consolidation."
Consumers have been rushing to file before the law changes: Personal filings are up 19.4% year to date through Oct. 8, versus the same period a year ago. More than 102,000 people filed in the week ending Oct. 7, a record high and an average of more than 20,000 filings per weekday, according to Lundquist Consulting in Burlingame, Calif.
Vet any program
Obviously, cost is a key factor. Some companies charge as much as 30% of debt owed. Debt Settlement USA charges 12% of the amount of money owed when you enroll, spread out over 10 months, so if you owe $10,000, you pay $120 a month for 10 months.
Freedom Financial Network offers two payment plans: 25% of the amount the company saves you (based on balance owed at enrollment), paid each time the company settles with a creditor, or 15% of the balance owed, paid each month the customer is enrolled.
Be wary of plans lasting longer than three years. "When they stretch out beyond 36 or 48 months, that's very risky for the client. At that point, some creditors are going to want to sue," Detweiler says.
Also, a good settlement company will warn you about possible tax consequences: Consumers sometimes owe income tax on forgiven debt. There are exceptions. For instance, if your debts exceed your assets at the time of settlement, you likely won't owe tax.
For more information on the tax consequences, consult a tax expert. Or, find Publication 908 on the IRS Web site at www.irs.gov. Look for the "debt cancellation" section.
With any debt-solution program, check with the Better Business Bureau and your state attorney general's office to see whether consumers have complained about the firm.
Go to www.naag.org and click on "find your attorney general." You can search companies' names through the Better Business Bureau at www.bbb.org (see the box at the top of the page that says "check it out").
For more information on debt plans and a list of questions to ask when choosing a credit counselor, visit the FTC Web site at http://www.ftc.gov/bcp/conline/pubs/credit/debt.htm.
Andrea Coombes is a reporter for MarketWatch in San Francisco.
# posted by Sponduliqs @ 9:49 AM 
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