| METHOD OF DEBT RESOLUTION | TYPICAL APPLICATION | LENGTH OF PROCESS | COST | ADVANTAGES | DISADVANTAGES | EFFECT ON CREDIT |
|---|
| CHAPTER 7 | • Below median debtors with at least $8-10,000 in dischargeable debt (typically credit cards, medical bills, utilities)
•Above median debtors who can beat the means test | • 2-3 weeks prepetition preparation, longer if debtor needs time to pay a fee
• Can be done more quickly in cases of emergency
• Once filed, Court process takes about 90 days | * For a quote, complete the 60-second questionnaire.
• We can usually match any other attorney’s fee
| • Quick fresh start
• Stop garnishment, levy, and avoid 1099 (tax document) for canceled debt | Loss of nonexempt assets (which only happens about 5% of cases, and can be minimized or avoided with good legal advice) | • Reset at about a 600 score within a year
• Get a mortgage in 2-3 years |
| CHAPTER 13 | • Stop sheriff’s sale and cure arrears
• Above median debtors who cannot beat the means test
• Pay off priority debts
• Wipeout marital obligation (other than support)
• Debtors with nonexempt assets that they want to keep
• Debtors with prior chapter 7 within last 8 years, but more than 4 years | 3-5 years | • Starts at $2,900 plus fees
• Minimum of $500 down | Fees don’t need to be paid in full prior to filing | It takes 3-5 years to start rebuilding credit | • Similar to chapter 7, with the caveat that it is difficult, though not illegal or impossible, to procure credit while in the 13
• And you really don’t start rebuilding until you’re done. |
| DEBT SETTLEMENT (BANKRUPTCY ALTERNATIVE) | • Debtors with 1-2 major debts, perhaps disputed
• Debtors with reasons not to file 7, such as nonexempt assets or too much income | 2-3 months. We typically start with the biggest ones first. The general rule is that old debts settle for 50 cents on the dollar | $500-$1,000 for one creditor, less for additional creditors | Can sometimes avoid bankruptcy | • To settle, you still have to pay the creditors
• Can exceed the cost of bankruptcy
• It’s not always successful
• You can get 1099’d for forgiven debt | Will still affect credit about the same as bankruptcy |
| LETTERS TO CREDITORS (BANKRUPTCY ALTERNATIVE) | Debtors on social security | It takes about 6-12 months for calls & bills to stop | $750 for the first 90 days, then, at client’s option, $375 per 90 days thereafter | • Less expensive than bankruptcy
• Sometimes referred to a “poor person’s bankruptcy”
• No paperwork to fill out
• No court to appear at | • Not as effective as bankruptcy.
• Creditors can sue, try to levy bank accounts
• Creditors can send 1099s
• Judgment Creditors can get an order to disclose assets, and a warrant if the debtor fails to abide. | • 7-10 years
• The idea is that the debtor will not likely have much need for good credit |
FOR-PROFIT DEBT
RESOLUTION SERVICES | • People who have been convinced that bankruptcy is a bad thing
• See also debt settlement above | • Can take 5 years
• Typically implode after about two years | • Can cost thousands
• Fees paid first
• Additional fees upon settlement | Good question | • Creditors can still sue you and get a judgment enabling garnishment of wages and/or bank levy
• You can get 1099’d.
• Operators of these services are often not licensed in the State of Minnesota | Even if successful, you won’t start to rebuild until you are all done |
| NON-PROFIT CREDIT COUNSELING (FAMILY MEANS, LUTHERAN SOCIAL SERVICES) | People with high income (or nonexempt assets) who can’t file chapter 7, and would likely have to pay all their debts in full in chapter 13 | 5 years | Nominal, just pay the debts back | • They will handle calls from your creditors
• They can be successful in getting creditors to waive or substantially reduce interest
• They will also honestly tell you if you really belong in bankruptcy, unlike a for-profit debt resolution service | • It takes five years to rebuild
• You still pay the debts back
Some creditors may drop out | • Your credit will be bad for several years since the creditors are reducing interest
• You won’t really start rebuilding until you are done |
| DEBT CONSOLIDATION | People with good credit and nominal debt or high income | As long as it can be done, e.g. a second mortgage can be a 30-year note | Basically nothing – you are paying the debt, hopefully with less interest. | • Can preserve credit
• Can lower interest | • It takes a bite out of cash flow, especially if done by way of a 401k loan.
• Additional payments can be a stressor on the budget
• If the consolidation loan was taken out with help from relatives, that can cause preference if a bankruptcy becomes necessary | Possibly not applicable |
| DO NOTHING | • Debtors on social security
• Procrastinators
• Self-employed debtors with few assets who can live on cash, and are hard to collect against. | Endless, until you do something about it | Nothing, until you do something about it, or start getting garnished and levied, charged bank fees | It’s easy, you don’t need to do anything.
It’s possible that creditors will give up and let the statute of limitations pass(typically six years) without using, then the debt goes away | Eventually creditors will get judgments, garnish wages, levy bank accounts | You will wallow in bad credit until you act to move forward |
