New Year, New You, No Debt

At the stroke of midnight on January 1st, a new year begins and with that comes promises of new opportunity.

I’m not sure how the concept of new year’s resolutions got started, but invariably people commit to a host of goals (some realistic, some not) in an effort to improve themselves and their lives over the course of the upcoming year.

According to popular opinion, the top 5 most common new year’s resolutions are to (1) lose weight; (2) quit smoking; (3) eat healthier; (4) spend more time with family; and (5) pay off debt.

By the look and feel of my suit pants today, God knows I am the last person who should be offering advice on losing weight, or any of the other health-related resolutions, for that matter.  But helping people get out of debt, now that’s right up my alley.

So how does one accomplish this resolution?  There are many ways people attempt to pay off debt, but not all options are created equal.  The important thing to know is that no matter what you do, you have to have a plan, otherwise you’re just repeating the same old behavior, and it would be insane to expect a different result.

PAY YOUR DEBT

Paying your debt is a great option…. if you can afford it.  But if you could afford it, you probably would have paid it by now.  Nevertheless, walk through a little exercise with me before you resolve to take this option.  Start by making a budget (for step-by-step instructions: https://leclawonline.wordpress.com/2019/11/08/dont-play-games-with-your-future/

Once you’ve determined your disposable income (what’s left after you’ve paid your bills), you’ll be able to set an amount you can reasonably afford to pay toward debt each month.  ***You still need a portion of your disposable income committed for savings***

Next, you need to know how long it will take you to pay off your debt with the amount you can set aside from your budget.  You can calculate your own pay-off plan using a simple calculator like the one provided by bankrate.com (https://www.bankrate.com/calculators/credit-cards/credit-card-payoff-calculator.aspx )

The length of your pay-off plan will depend on how much debt you have, and how much of your income you can commit each month.  In my experience, most people end up with a plan that will extend 7 years or longer.

Keep in mind, however, that most people don’t pay off their debt this way.  Why? Because life happens: The longer the repayment period, the more likely you are to have set back.  If you have an unexpected emergency expense (medical bill, car repair, etc), your entire plan could go down the drain.  If you miss a payment or if you add new charges to your credit card accounts, it will take even more money or a longer period to pay off your debt.   At this point (in my experience) most people abandon their plans altogether.

PROS     You avoid negative reporting on your credit history; No involvement of the court or other third parties

CONS     It’s risky (one misstep and your plan is derailed); It’s not affordable for most people in a reasonable amount of time

SETTLE OR CONSOLIDATE

This is the most common alternative that people ask me about.  It’s also the option I like the least.  It has the most risk but it still requires you to pay most (if not all) of your debt.

First, it’s important to understand the difference between debt settlement and debt consolidationSettling your debt requires a your creditors (each one, individually) to agree to take less than what you owe.  However, creditors are not usually inclined to negotiate if you’re steadily making minimum payments (that’s how creditors profit the most).   So you’ll likely need to default before you can negotiate – miss three or four payments, and now the creditor is looking to take what (they think) they can get.

This is risky, however, because it takes at least 4 months to negotiate your accounts, and during this time creditors can take you to court, obtain a judgment, and forcibly collect by garnishing your wages and/or levying your bank accounts.  If you have more than a few creditors, it can take a lot longer than 4 months and some creditors may not agree to negotiate at all.  So you may settle some, but not all, and now your plan is no longer manageable.

Finally, any amount of debt that is forgiven by the creditor may be treated as taxable income (you will owe tax on the amount of debt that you did not pay).  You have now taken unsecured and easily discharged debt and converted it to not-so-easily discharged debt (and let’s face it, no one wants to be indebted to the IRS).

While there are many debt settlement agencies that can assist you with these settlement negotiations, many are less than reputable (in y humble opinion) and often have expensive and confusing fee structures that add to your payment plan, or result in a longer payoff period.  They often “forget” to make sure you understand the risks, too.  Again, in my experience, many clients have attempted these programs, only to throw away thousands of dollars and still need to file bankruptcy because they cannot afford the payment plan in the long run (or they end up getting sued and garnished half-way through).

Debt consolidation, on the other hand, is taking on a new debt, which is immediately used to pay off your existing debt, in one lump sum.  This provides you with the ease of making a single payment, with one interest rate and therefore tends to be easier and more manageable than debt settlement (not so risky either).

But, if you’ve already defaulted on your exiting debt, it is unlikely that a new creditor will lend you money.  Either way, you have to be careful.  Many of these loans carry very high interest rates and exorbitant penalties.  ***Also beware of using home equity lines of credit to pay off credit cards.  Credit cards are more easily negotiated, and easily dischargeable in bankruptcy.  Home equity loans are secured by your home or other real estate, and if you default, your home is now in danger of being foreclosed.***

PROS   

  • You can pay off your debt with a single monthly payment
  • you may receive some debt forgiveness (reduction)

CONS     

  • Negative credit reporting
  • risk of lawsuits, judgments and wage garnishments
  • costly (and often confusing) fee structures
  • tax consequences

BANKRUPTCY

Now, I don’t say this merely because I am a bankruptcy attorney, but in many cases, bankruptcy really is the best (and most realistic) option.

Eligible individuals can eliminate 100% of unsecured, non-priority debt in as little as 120 days.  That would include credit cards, personal loans, medical bills and just about anything other than student loans, alimony/child support and (some) taxes.  This is accomplished through Chapter 7.

Individuals who do not qualify for chapter 7 can enter a court approved and monitored payment plan.  The payment plan is generally calculated based on what you can actually afford, and will not exceed 5 years.  You may be required to offer a payment plan if your income is above the “mean” income for your state and family size, or if you have “excessive” equity in property.

Although this option sounds very similar to debt settlement, there are many advantages.

  • You still make only one monthly payment (with 0% interest in most cases)
  • you are protected by federal law during (creditors cannot sue, garnish wages or take other collection actions while the payment plan is being negotiated or paid)
  • creditors do not have to agree to the payment plan  (the court can order them to accept the plan if it otherwise meets legal requirements)
  • even if you only pay a fraction of your debt, there are no tax consequences as with an out-of-court settlement.

PROS 

  • Fast and easy
  • pay as little as $0 on credit cards, personal loans, medical bills and most other collections
  • court-mandated protection from lawsuits, judgments and wage garnishments
  • no need to negotiate with each individual creditor
  • exemption from tax consequences.

CONS 

  • Negative credit reporting
  • may not be an option for people employed in the financial industry

CONCLUSION

  • Before you make a decision on how to resolve your debt this year, consider all of your alternatives and keep these principles in mind:
  • seek expert advice from reputable sources (and no, your friends and family are not reputable sources – what they did may not be an option for you)
  • do not over-extend yourself when committing to a payment plan
  • read, read, read all documents before you sign anything and ask questions (make sure you understand the process and fee structure before you agree
  • be realistic (if it sounds too good to be true, it probably is)

Benefits of Bankruptcy

  • Eligible filers eliminate 100% of credit card debt in as little as 4 months
  • Relief begins immediately upon filing (end harassing collection calls and protect yourself from lawsuits, wage garnishments and repossession)
  • start rebuilding credit immediately after filing
  • Pre-filing payment plans (for legal fees and court costs) are readily available

Still unsure about Bankruptcy?  Read through many frequently asked questions in one of my earlier posts:  https://leclawonline.wordpress.com/2018/06/14/bankruptcy-faqs/ 

Dispel all of your bad notions about Bankruptcy!  Read Bankruptcy Myths Debunked! in one of my earlier posts: https://leclawonline.wordpress.com/2018/12/18/bankruptcy-myths-debunked/

 

Call, Text or E-Mail for a free initial Consultation

It takes only 15 minutes

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LAW OFFICE OF LEAH E. CAPECE, ESQ., LLC

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Phone: 908-353-6700 Fax: 908-838-9991 Cell (Text): 908-266-4843

E-Mail: lcapece@leclawonline.com

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*THE FOREGOING ARTICLE IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSIDERED OR RELIEF UPON AS LEGAL ADVICE*

 

 

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