Sacramento Bankruptcy Attorney Blog

Are Debt Counseling and Loan Consolidation Services Worth the Trouble?

With the Sacramento debt problems rising, credit card debt has become even more unmanageable. My clients usually ask me if consolidating their credit cards with a debt servicing company is an option they should consider. While debt relief companies certainly make a strong pitch that they can help you get out of debt, I am not convinced that these debt settlement plans truly provide individuals with a fresh start.

Options for Dealing with Credit Card Debt

In a recent New York Times article, Weighing the Options With Credit Card Debt, the author reviews common options available for those with credit card problems. The article highlights the need to carefully consider your budget and the financial advantages of a settlement plan when deciding on a solution for your debt. For example, if you have hardly any disposable income, you may not be able to justify paying a large upfront fee for a company to manage your debt. In addition, there may be monthly fees charged by these companies. In the end, you may end up back where you started, unable to make your monthly payments, even though the payments are in a new form, such as a longer payment term, lower rate, or single consolidated payment.

Credit Card Debt Settlement; When Does it Make Sense?

In my opinion, there are a few challenges for Sacramento residents who want to settle or pay off their credit card debt by using a consolidation company. First, the challenge is to find a proven company that is affordable and actually gets results for its clients. Second, the applicant should have enough money to hire the debt relief agency. Third, the applicant should be able to qualify for the money payment plan to the group of creditors. Fourth, the applicant's income should be low enough to justify a creditor making some concession, like lowering the interest rate on the card debt. Getting a creditor to reduce the principle balance on the credit card account is rare, and it usually takes a large upfront payoff to the creditor. The final hurdle is that the total amount of debt should be low enough so that financing it into a payment plan is reasonable and doesn't stress out the applicants finances for the rest of their life.

As you can see, there are many reasons to disqualify someone from a credit card loan consolidation plan. In limited cases, it might make sense where the individual meets the above criteria. Personally, I have found it to be quite rare that one of my clients will achieve a better financial result in a debt settlement plan. As a bankruptcy attorney in Sacramento, my goal is to navigate through the various options outside of bankruptcy. Admittedly, its not easy to keep up with all of the newest debt elimination advertisements in Northern California. While bankruptcy is not right for all candidates, I do find in my practice that most of my clients realize a more significant debt discharge by filing bankruptcy.

Comparing Bankruptcy to Credit Consolidation Plans

An eligible and qualified Chapter 7 debtor in Sacramento can usually discharge all of their unsecured debt. Credit card debt is usually unsecured. If a discharge is issued in the case, creditors are permanently barred from contacting the debtor to try and collect the old debt. The debtor has a fresh start. The Chapter 7 process usually takes about four months to complete.

Individuals with higher than average income who qualify for Chapter 13 usually pay only what they can afford to pay on unsecured debts. The payment plan in most cases is between three to five years and the interest rate is usually zero. Again, once the payments are completed, the remaining debt is discharged, and the creditors can no longer attempt to collect the debt from you.

Credit card consolidation on the other hand may require the applicant to pay interest on the debt over a longer period of years and to completely eliminate all of the debt the applicant usually must make a large payout offer. The viability of the settlement agreement will often depend on the quality of the company handling the debt services.

Will Bankruptcy Ruin My Credit?

Keeping your credit in tact after bankruptcy is an important consideration. In many of the cases that I come across at my bankruptcy law firm in Sacramento, my clients already have bad credit before they file bankruptcy. Usually, they have missed several payments on their credit cards and mortgage loans. In addition, their credit reports are filled with a large number of accounts, often with large balances. The bottom line is that if you are considering bankruptcy, your credit is probably in need of a tune up. The real question that I focus on is, how to improve your credit?

Bankruptcy Eliminates Most Debts

The fact is that credit card companies have designed their borrowing process in such a way that most people can never afford to pay off their debts. With high interest rates, late fees, and incentives to spend more and more, its no wonder why your credit card debt grows so quickly. Once you have accumulated a maximum limit credit card debt, most of you can only afford to make the minimum monthly payments. This is the biggest obstacle to maintaining a high credit rating.

While filing bankruptcy certainly is a negative item to have on your credit report, it may actually strengthen your credit rating in the long run. Why? Because, clearing away massive amounts of credit card debt, and other delinquent debt raises the likelihood that you can repay new debts. Unfortunately, you won't begin to reap the benefits of your newly cleared balance sheet for a few years. Most banks will not approve a loan to someone who has filed bankruptcy in the last two years. However, ask yourself this: would a bank approve you for a loan based on your current credit status? In other words, how bad is your credit without filing bankruptcy?

The impact of bankruptcy on your credit lessens over time. So while the filing may remain on your credit report for up to ten years, its often possible to obtain new credit cards and loans within just a few years after filing bankruptcy.

On the other hand, for those of you with a strong credit rating now, think seriously before filing bankruptcy. Your credit after bankruptcy will prevent you from obtaining new loans for several years and when you do, you won't be getting the strong credit type of interest rates that you once did. So for some with strong credit and an ability to repay their debts, avoiding bankruptcy might be the best solution.

Does Bankruptcy Protect my Property from Creditors?

In the Sacramento area bankruptcy clients often ask me how to stop creditors from filing a lawsuit against them, garnishing their wages, levying their bank accounts, or placing a lien on their property. In short, they are concerned that a credit card company or other creditor will take property from them because they have a past due debt with the creditor. When you are having trouble making regular monthly payments, the last thing that you can afford is for creditors to take money from your bank accounts or paychecks.

Fortunately, when a debtor files bankruptcy it triggers an automatic stay against most creditor action. With some exceptions, the automatic stay protects debtors by freezing the collection and enforcement actions against them for a certain period of time.

Protection from Lawsuits?

Some of my clients were in default with a credit card company. After several months of nonpayment the creditor filed a lawsuit. Considering the consequences of the creditor's action, I filed a Chapter 13 bankruptcy on their behalf. Had the creditor been allowed to continue its lawsuit and obtain a judgment, my clients' would have been at risk of having a lien attached to their home.

Stopping Wage Garnishment?

In most cases, the automatic stay gives debtors protection against wage garnishment as well, even if the garnishments have already started. While some creditors may obtain relief from the stay, the creditor must have a valid reason for obtain such relief.

Can You Protect Your Home From Foreclosure?

Filing bankruptcy may stop or delay the foreclosure sale of your home, even if the payments are several months late. This is because a foreclosure sale is considered an enforcement action, whereby the creditor attempts to collect on the mortgage debt. While the foreclosure is only barred until the mortgage company obtains relief from the automatic stay, the delay may give the debtor enough time to decide how to deal with the debt on their home.