Should I take out a loan or File For Bankruptcy?

If you are in debt, you may be considering whether or not you should take out a new loan to pay off your debt or file for bankruptcy. Many people are always undecided what they should do to get their credit score back on track. For many people, debt relief may seem impossible. Many people who come to us can’t afford to hire a bankruptcy attorney and can’t take out new loans because they don’t have good credit. In turn, this means they can’t afford to pay off their debts.

We understand how upsetting it can be when your debts have been sold off to debt collection companies and you are worried about your creditors suing you. Credit card debt can cause you emotional and physical stress. Between the harassing phone calls and letters from debt collection companies, and your credit score continuously dropping it can turn to a frightening situation. What becomes even more frightening is when people sign up for debt-relief companies or debt consolidation companies and end up in a scam.

Many of these companies will offer people to take out more debt before clearing up their debt. If you are already struggling to pay off your bills each month, it is usually not the best idea to try and take out another loan to pay off your debt.

Why Do People Try to Take out Another Loan to Pay off Their Debts:

When an individual can’t pay their bills, debt collection agencies will keep calling them endlessly. In many cases, debt collectors can become increasingly harassing. Many times, debt collectors will try and get individuals to sign up to a payment plan to pay off their debts, in order to get them to stop calling.

People who don’t have the money to pay their payment plans, may assume that taking out more debt to try and settle these cards may be the right way to tackle their debt. Unfortunately, taking out more debt to pay off credit card debt is generally not the best way to tackle debt for most people.

Many people don’t realize that taking out more debt to pay off old debt isn’t in their best interest. Individual’s who do this  will typically end up paying high interest rates, double the amount they owe and risk ending up in an even worse financial situation than they were already in. Typically taking out new debt to pay old debt, is in the best interest of the debt collector and not the individual.

Is a Debt-Relief Program a Good Option?

People who are already struggling to pay off their debt, often find themselves wondering if they should sign up to the many debt relief programs that are available. Many times, these debt-relief programs are scams. Most people who fall victim to these predatory debt-relief programs fail to understand how these programs work.

If you are thinking of  signing up for a debt-settlement program -you should understand how these programs work. Many times, these companies fail to tell people that the individual must be late on their bills before they can settle their debts. The credit card companies will want to see that the individual has a financial hardship. Typically, credit card companies won’t start negotiating with someone until they are at least 180 days late. During this time, many people’s credit scores get lower. Moreover, once they are late, there is no turning back. Credit card companies report these late payments to the credit bureaus. Thus, even if an individual decides they no longer want to settle, it is too late.

Many people have too much debt and can’t afford to settle all of their debt at one time. Debt settlement is best for individual’s who have a lump sum of money to offer. For example, if an individual owes American Express, Discover Bank and Citi bank each $10,0000, that is $30,000 total in debt. Typically, debt negotiation companies will have individuals put money into account each month and settle with each creditor once the account has a high enough balance to offer a settlement. Even if the individual builds their account to settle with one creditor they still run the risk of being sued by the other creditors, who they haven’t settled with.  Most people who find themselves in these situations and are forced into bankruptcy after spending thousands of dollars on these debt settlement companies. Many debt settlement companies and debt consolidation companies aren’t regulated. Many of these companies use sales tactics to get people to sign up to their programs instead of  looking at an individual’s financial circumstances and determining what if this is the right option for the individual. Unfortunately, many times, debt settlement companies provide individual’s with a sense of false hope when it comes to tackling their debt.

What is a Debt Consolidation Loan?

Sometimes, debt collectors urge individuals to take out a debt consolidation loan to pay off their debt. A debt consolidation loan is a loan that is taken out to cover all of an individual’s debts so that instead of having multiple monthly payments, they will only have one.

Many people find having one payment each month very appealing. Unfortunately, for many people a debt consolidation loan merely shifts their responsibility into another loan. For many people who can’t afford their regular monthly payments, they typically end up not being able to afford their consolidation loan payment either.

Individuals who are considering filing for bankruptcy typically have hundreds of dollars in minimum payments. The only way a debt consolidation loan can help someone is if their monthly payment is less than all of the debts combined. This is rarely the case.

Moreover, when an individual takes out a debt consolidation loan the lenders typically require that the individual uses their property as collateral. This means that a creditor can take the individual’s property if they fall behind on their debt consolidation payment. Many debt consolidation programs will ask individuals to put up their houses or cars as collateral.

Should I hire a Debt Consolidation Company to Manage My Debt?

This is where a debt consolidation company promises to negotiate and lower the payments as a debt management plan. There are many things that debt settlement companies fail to tell individual’s before they sign up for these companies. Some of the most common pitfalls that debt consolidation companies fail to tell individuals are:

1. Their prices may be expensive: Many times these companies don’t differentiate what gets paid into the plan and how much the fees are that will go to the company. Sometimes fees that individual’s put into their account go to the debt consolidation company before going to settling their debt. This means that the interest and fees on their debt continue to accrue and only the debt consolidation company is being paid.
2. Some creditors don’t work with debt consolidation companies: Many individual’s assume their creditors will work to negotiate a payment plan with these debt settlement companies. However, this is not always the case. Creditors don’t have to work with debt consolidation companies and many don’t.
3. Individuals will typically end up being in these plans for much longer than if they just filed for bankruptcy. Typically when individuals lower their monthly payments in their debt consolidation program, it means that they will be in the plan longer. Moreover, they run the risk of credit card companies suing them for the outstanding debt. Debt consolidation can take years to complete. Whereas, bankruptcy will only take a few months.
4. Individual’s will owe Taxes on the Forgiven Amount of debt- Many people don’t realize that any forgiven amount is counted as taxable income.This means that they may owe money when they file for taxes. For example, if a person owed $30,000 in debt and they settle their debt for $10,000 the amount that was forgiven ($20,000) will be taxed and most people can’t afford to pay back those taxes. When a creditor writes off a bad debt, they will send an individual a 1099 form so that they can report the forgiven amount of debt as income.

Why is Filing Bankruptcy a Better Debt- Relief Tool?

Most individuals get scared when they hear the words “bankruptcy.” Many times, people assume that filing for bankruptcy means they will never have credit again. This is far from true. Bankruptcy laws were implemented to allow people to get a fresh start. Below, we will discuss some of the advantages of filing a Chapter 13 or Chapter 7 bankruptcy:

1. Bankruptcy can be a much shorter process: Typically, in a Chapter 7 bankruptcy individual’s can get out of debt rather quickly. Chapter 7 bankruptcy, is the fastest bankruptcy and typically takes about four to six months to complete. Unlike debt consolidation companies that can take years, Chapter 7 bankruptcy allows individuals a fast way to start over.
2. Creditors can no longer go after individuals who file for bankruptcy: When individual’s file for bankruptcy, an automatic stay is initiated. The automatic stay prevents creditors from pursuing individuals for their outstanding debts. This means that any pending lawsuits or other debt collection tactics must cease. Creditors who fail to obey by the automatic stay can be fined or held in contempt by the Bankruptcy Court.
3. Individual’s who have wage garnishments will have the garnishment stop: When a creditor gets a judgment against an individual, one of the most common types of collection is where a creditor garnishes a persons wages. When this happens, a creditor will send an individual’s employer a letter stating that they must withhold a certain amount of money to pay off their debt. For many people, this can be embarrassing. Filing for bankruptcy will immediately stop any wage garnishments that are already in place or will be in place in the near future.

What Debts Can be Eliminated in Bankruptcy?

Unlike debt consolidation loans and debt settlement programs, that sometimes won’t include all of your debts, bankruptcy can include some debts that those debt relief options can’t. In a Chapter 7 bankruptcy, their are many unsecured debts that can be eliminated through bankruptcy. Some of these debts include:

• Credit Card Debts
• Personal Loans
• Medical Bills and expenses 
• Personal Judgments
• Some tax debt
• Utility bills
• Back Rent
• Debts from a voluntary repossession or surrender
• Debts from a vehicle repossession

What Are the Different Chapter of Bankruptcy For Individuals?

There are two main types of bankruptcy for individuals, Chapter 13 and Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, an individual gets a discharge. This means that the individual no longer has to pay their outstanding debt. To qualify for a Chapter 7 bankruptcy, an individual must pass a Means Test. The Means Test takes into account an individual’s household size and income and compares it to the State’s median household size and income. As long as the individual’s income is less than the median income, the individual will pass the Means Test and qualify for Chapter 7 bankruptcy.

Chapter 13 bankruptcy, is for people who have more assets and higher income. Individuals who don’t pass the Chapter 7 Means Test, will need to file for Chapter 12 bankruptcy. In a Chapter 13 bankruptcy, individuals repay their debts over a period of 3-5 years.

Individual’s should gather all of their financial information and speak with a qualified bankruptcy attorney to see what chapter of bankruptcy they qualify for and what debt relief option is right for them.

Karra L. Kingston Esq. has helped hundreds of people get out of debt and obtain a fresh start. Karra is an experienced New York and New Jersey bankruptcy attorney that will hold your hand through the bankruptcy process so that you feel comfortable and understand the process. Ms. Kingston has been featured on Nj.com, Upsolve.org, and the Star Ledger and helps people every day get out of debt and obtain financial independence.