Debt is something you hear a lot about and you also hear about different ways to get out of it. But I thought I'd try to summarize and define some of the general terms used when people discuss such things because being 'in debt', or 'buried in debt' is something that can happen to anybody...and does.
First of all, you know the implications involved when it is said that one has too much debt. That phrase carries certain specific meanings and subjective implications:
- You owe more money than you could ever possibly payback in this lifetime, or
- you could pay it back but you don't like the idea of eating pork n' beans for the next 60 years,
- there's also the assumption that interest, fees and penalties have gottn out of hand,
- you're being hounded by bill collectors,
- any chance of getting future credit, if you really need it, is out of the question,
- sometimes it effects your chances of getting or holding a job,
- and it frequently effects your job performance.
You get the idea.
Once a person gets into that situation, they have a variety of options:
- Suicide....which still could leave your debt to relatives or dependants,
- win the lottery....not very likely,
- sudden chance for the positve in business success....mmm, possible but usually not likely,
- do nothing...in which case everything gets worse and the problem gets harder to ignore,
- Bankrupcy, either Chapter 7 or Chapter 13, both of which are harder to do today although still possible and still have varying negative consequences,
- Debt negotiation....fairly common today, and
- Debt elimination.....a fairly new option and becoming increasingly popular.
Obviously most people fall into one of the last four categores so here's some info about them:
Chapter 7 Bankrupcy is a legal, court-supervised process. A trustee collects the assets of the debtors' estate, converts them to cash, and makes distributions to creditors, subject to the debtors' right to retain certain exempt property and the rights of secured creditors. Each state may have different exemption laws which of course need to be looked at individually.
Because there is usually little or no nonexempt property in most Chapter 7 Bankruptcy cases, there may not be an actual liquidation of the debtors assets. These cases are called no-asset cases. I had one of these several years ago. For that reason, in most cases a debtor with assets that they wish to keep and that are not covered by exemptions file Chapter 13 Bankruptcy.
A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most Chapter 7 cases, the debtor receives a discharge that releases the debtor from personal liability for certain dischargeable debts. The debtor normally receives a discharge three to four months after the petition is filed.
Most people who really understand the ramifications here agree that although Chapter 7 Bankruptcy may be an option for some debtors this process should only be exercised when all other options and efforts have been exhausted. Individuals considering this option should also understand the detrimental extent this procedure will cause to the individuals credit worthiness because in most cases Bankruptcy remains 7-10 years on a credit history.
Generally Chapter 13 Bankruptcy is preferred by debtors who have a valuable asset, such as a home, that is not completely covered by exemptions and which they wish to keep. This is possible because under Chapter 13 a debtor proposes a plan to repay creditors over a three to five year period during which the debtor can make up overdue payments on any assets and pay into the plan the equivalent value of any assets not covered by exemptions.
Since the debtors plan will require regular monthly or biweekly payments, Chapter 13 is usually only appropriate for an individual debtor who has a regular source of income.
At a confirmation hearing, the court either approves or disapproves the plan, depending on whether the plan meets the applicable bankruptcy codes for approval. Chapter 13 is very different from Chapter 7 Bankruptcy, since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors through the trustee based on the debtors anticipated income over the life of the plan.
Unlike Chapter 7 Bankruptcy, the debtor does not receive an immediate discharge of debts nor does he/she pay back any less than the full, original, entire amount owed. The debtor must complete the payments required under the plan before the discharge is received even though they are protected from lawsuits, garnishments, and other creditor action while the plan is in effect.
The discharge is also considerably broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7. Chapter 13 bankrupcy is the most rigid form of bankrupcy and should probably be the last choice for people with serious debt problems. And just like Chapter 7 bankrupcy, the results stay on the credit record for 7 - 10 years.
So what other remedies to excessive and unmanagable debt are there?
Something that's become very common today is known as 'debt consolidation'. It's done by companies who claim to be on the side of the consumer but actually they are compensated by the creditors based on the amount of money they are able to get the customer to pay. They only possible advantage to the consumer is that usually interest and penalties are stopped and the consumer does get to stretch the payments out over a longer period of time. But in no way is any debt eliminated or forgiven.
The process of debt consolidation is sometime looked upon as merely a reorganization of ones debt. This process involves the payback of the entire debt within an extended period of time by scheduled, minimum payments. Downsides of this process are that the length of time may be greater, it shows on your credit report identically to filing Chapter 13 Bankruptcy and if dropped by a consolidation program there is no option to reenter a similar program with most creditors.
So, it seems clearly there isn't much of an advantage to the consuber to do 'debt consolidation.'
The only sensible option, assuming one is unfortunate enough to be in this situation, is really Debt Elimination. Debt elimination does just that.....i.e. the debt disappears.....i.e. the creditors get to 'eat it'.... which of course doesn't hurt the feelings of most consumers :-)
Debt elimination experts actually do represent the consumer (whereas Debt Consolidation people represent the creditors). The client representative from the debt elimination company negotiates the amount owed the to creditor down substantially from the originally owed amount.... often as much as 60% or more. The reason they're able to do that is because the creditor is greedy and knows that the debtor is protected from their further harrasment (because it is a Federally regulated program intended to get 'taxpayers' back 'into' the system) and they understand that it's better to settle for something than to get nothing. In most cases, by the time the final payment settlement is negotiated, the creditor has already written off (i.e. as a 'loss') the debt anyway.
So..the process of 'Debt Settlement' or 'Debt Negotiation' is simply the process of eliminating unsecured debt (as differentiated from 'secured debt'...an important distinction) for less than what was originally owed. It is a process of working with an individuals creditors and arranging an agreed amount to be paid back in one lump some. This process accomplishes three important things:
- It always saves an individual a tremendous amount of money in total payback.
- It totally eliminates their debt (assuming the client completes the program).
- The payments required (scheduled) are much smaller than under debt consolidation which means that the client is able to maintain a much more 'normal' lifestyle than with other programs.
- It eliminates the debt within a much shorter period of time (than debt consolidation), and eliminates their debt in a shorter period of time.
As you can see, 'debt elimination' makes a lot more sense, doesn't it?
But there's one more solution, even though it's a really stinky one, that I've got to tell you about. Remember that we're talking about 'unsecured debt' here right?
What some unscrupulous bankers are known to do is convince the debtors to take loans, with various types of hip sounding names, often using their home as collateral, to pay of their debts.
Homes are tangible things aren't they? So wouldn't that be a 'secured' debt now?
Sure it would....but I've seen several people do it before somebody had a chance to esplain to them what they'd done...i.e. turning an unsecured debt into a secured debt. A debt secured by the biggest investment and arguably the most important investment they ever made.
But as long as credit card companies and banks are making it easy even for high school kids to get credit cards and as long as merchants and stores offer ridiculously easy (sounding) credit terms to get their product 'off the floor' it's not likely that the staggering growth in the debt burden of the American public will slow down (much less stop) any time soon.
Even though it goes against the Bible admonition of 'neither a borrower or a lender be'....debt is probably here to stay. I'm presently working as a Senior Credit Analyst at Liberty Settlements now and we're getting people back on the road to being debt free and credit worthy every day. If you have any such situation you'd like to consult with me about or if you know anybody who does, don't hesitate to gimme a call at 281 236 2852 or 1 877 356 0398) immediately because every day you wait costs you more.
Don't you wish you could simply print money to pay off your debts like the U.S. government can/does?
