As the number of bankruptcy filings increase many are calling for debtors to seek out and use bankruptcy “alternatives.” However, some of the alternatives to bankruptcy that are suggested may cause more financial pain for debtors who are already distressed. Let’s look at some of the facts.
While on the surface debt settlement seems to offer an opportunity for debtors to reduce their debt obligations while simultaneously avoiding bankruptcy, the truth is that most debtors are unable to benefit from debt settlement. As we have mentioned before, while some creditors are willing to settle debts for less than what a debtor owes, many creditors refuse to deal with debt settlement companies and have no legal obligation to do so. Only bankruptcy can legally obligate creditors to at least show up to the negotiating table. Even if a debt settlement company is able to negotiate settlements with some of a debtor’s creditors, there are other creditors that they will most likely not be able to come to a settlement with such as the IRS, state taxing agencies and other government creditors (i.e. speeding tickets etc.) Also many of these debt settlement companies charge large upfront fees which must be paid whether or not the company is successful at helping the debtor.
Like Chapter 13 bankruptcy, debt consolidation is designed to put all of the debtors unsecured debts into one easy payment; but the problem comes it when the debtor cannot make payments. Like Chapter 13 bankruptcy, many debt consolidation repayment plans can last for years; which increases the chances of the debtor facing more financial difficulties during the repayment plan. Unfortunately, unlike Chapter 13 bankruptcy, these plans don’t have mechanisms that account for these very possible financial difficulties in the future. As a result a debtor may pay successfully into a debt consolidation plan for a year or so then lose the plan because they are no longer able to make the payments. Chapter 13 bankruptcy will allow a debtor to reduce their monthly payments or even convert the case to a Chapter 7 bankruptcy if they are unable to make payments as originally agreed due to new financial problems.