Bankruptcy – Debt Negotiation – Voluntary Workout

If you are contemplating the possibility of bankruptcy, you should be aware that several different optional processes exist.  Each of these processes has a different overall likelihood of reducing your debt, and a different long term affect on your credit.  The selection of the process that is right for you depends on a variety of factors.  Some of the possible benefits and outcomes of each option are as follows:

BANKRUPTCY

There are different types of bankruptcy filings. The type of filing most appropriate to your situation has a significant effect on the benefits and disadvantages you may receive.

A.      Some possible benefits to a personal bankruptcy may include:

  1. The bankruptcy code requires that all creditors and debt collectors immediately cease all contact with you immediately after your file. This is called an “automatic stay” and it means no more harassing phone calls or mail.
  2. The “automatic stay” also means that wage garnishment, evictions, foreclosures, and litigation against you are all stopped as well.
  3. The court can order the complete liquidation, or discharge, of all unsecured debt, such a credit card debt.
  4. The court can order the liquidation of some federal and state income taxes, though compliance with certain filing requirements must be met.
  5. The court can approve a plan to allow retention of houses, cars, and personal property.

B.      Some possible drawbacks to a personal bankruptcy may include:

  1. A bankruptcy filing remains on your credit report for 10 years from the date of filing.
  2. If you have too much equity in a piece of property you may be required to pay that amount to the court, that then distributes it to your creditors.
  3. A background check done by prospective landlords and employers will reveal that you have filed for bankruptcy.

DEBT NEGOTIATION

Debt negotiation is simply negotiating with your creditors for a reduction in the amount that you owe them.

A.      Some of the possible advantages to negotiating your debt may be:

  1. If you are able to enter into an agreement to pay off the amount owed in a lump sum, the debt is eliminated.
  2. You are able to manage your debt and avoid the disadvantages of bankruptcy.
  3. Paying off one creditor sometimes makes it easier to pay more toward other debts.

B.      Some possible disadvantages to negotiating your debt may be:

  1. If you pay off a creditor and then later file for bankruptcy, you lose the amount of money paid that creditor, i.e.: you could have had the benefit of keeping it rather than giving it to the creditor.
  2. A creditor will frequently issue a 1099 income tax form which requires you to pay income taxes on any amount that was forgiven by the creditor.
  3. Most creditors will not discuss any reduction in the amount owed, or changes in other terms, until you are already behind on your payments.

VOLUNTARY WORKOUT

A.      Some possible benefits to arranging a voluntarily workout with your creditors may include:

  1. You are able to manage your debt and avoid the disadvantages of bankruptcy.
  2. You can enter into an agreement with a creditor to make smaller payments over a longer period of time.
  3. You can enter into an agreement with a creditor to pay only a portion of the debt to satisfy the account.
  4. A creditor may agree to reduce the amount owed and accept smaller payments over a longer period of time.
  5. Creditors may be more open to negotiating a reduced payoff if they know they are working with your attorney as part of a voluntary plan, and as an alternative to being discharged in a bankruptcy.
  6. You do not lose the right to file a bankruptcy in the future.

B       Some possible disadvantages to arranging a voluntarily workout with your creditors may include:

  1. A creditor will frequently issue a 1099 income tax form which requires you to pay income taxes on any amount that was forgiven by the creditor.
  2. A creditor may agree to a lower payment over a longer period of time, but this may mean that you are paying more in interest.
  3. Not all of your creditors may agree to participate in a workout plan.

The author, Margaret Montana, is a Cleveland Ohio Bankruptcy Attorney.  The information provided above is intended as a general overview of alternative approaches of debt reduction or bankruptcy for Ohio individuals.  For a more thorough explanation or to determine if bankruptcy is right for you, you should discuss your circumstances with a bankruptcy attorney.