Saturday, January 24, 2015

Debt What?

Image courtesy of Stuart Miles at
Like many bankruptcy attorneys, I suspect, I have had clients come into my office and talk about the horrible experience they had with a "debt management" company. They complained about high fees, large monthly payments and after a few months finding out only one creditor has been paid and several others have initiated law suits. As a result, they ended up in my office, a couple hundred or thousand dollars poorer and filing the bankruptcy they wanted to avoid anyway.

I've also had a client come in for something else and tell me how she used a "debt management" company that successfully reduced interest rates and lower payment making it easier to pay her bills off over a 5 year period. Unfortunately, she used every dime of her retirement money and was still working full-time at over 70 years old. I assumed it was just a matter of a good company vs. a bad company.

As a result, I started looking for a good "debt management" company for client's who want to try something before bankruptcy. During my research I came to discover there are two types of organizations and they are Credit Counseling/Debt Management organization and Debt Settlement companies. A Debt Management company walks people through their finances, determines if they have enough income to fund a budget, talk to the creditors, and negotiate repayment plans. The indications are that a repayment plan through a Credit Counseling/Debt Management Organization has minimum impact on a person's credit report - "Impact of debt management plan on your credit report and scores"

From what I understand, a Debt Settlement Company is a little more guerilla. They charge their clients larger fees. The companies take lists of creditors, collect payments from their clients, allow credit accounts become delinquent, and settle accounts individually as the company accumulates enough money through the debtor's payments. The creditors probably are not contacted until the settlement company is ready to negotiate a settlement. As a result, the creditors continue to try and collect the debt while the debtor is paying the settlement company. Once a debt is settled, it is marked "settled" on the credit report indicating it wasn't paid in full and further damages a debtor's credit report - "The Dangers of Debt Settlement"

These may be an alternative to bankruptcy under the right circumstances for the right clients. Credit Counseling/Debt Management could be helpful for someone who had a short stint of unemployment or a short but serious accident or illness; a difficulty that has a short life with little chance of recurring. This would minimize the impact on a credit report but could take years to pay the plan.

A Debt Settlement Company might work for someone who is already a few months behind on payments and only has a couple open credit accounts to deal with. I could see how someone would consider this method more convenient than bankruptcy.  This type of client should be ready for the credit of additional income to them. The creditor will probably issue a 1099-C reporting the cancelled debt to the IRS as income to the debtor.

While these may be viable options, I think bankruptcy, under Chapter 7, has its advantages. First, there are no further payments to creditors. Debtors free up current income immediately. The automatic stay stops creditors efforts to collect the debt immediately and the entire bankruptcy will usually take a few months. I think it alleviates the pressure on a client to withdraw retirement money. I recommend people not use retirement funds to pay debts because most retirement accounts are protected by bankruptcy law. Finally, any income reported to the IRS for the discharged debt may be avoided by filing an IRS Form 982 with that year's tax return.

If you feel like you are drowning in debt and start looking for options, make sure you do your research and understand your options. If you chose poorly, you will throw good money after bad and end up paying additional fees for no value. Making the right choice the first time gets your life back on track faster ... and ... remember for some people ... bankruptcy may be your only real option.

If you want assistance, legal representation, or just want to know more about Medvesky Law Office, LLC, check out our website at

Other articles to read:
"Revisiting Debt Settlement (Again?)"

NOTE: Some of this information comes from a conversation I had with an owner of a local Credit Counseling/Debt Management Organization that I come to believe to be reputable. I did not talk to anyone working with a Debt Settlement Company.

#bankruptcy #Chapter_7 #Chapter_13 #Montgomery_County #law_firm #Bucks_County #Pennsylvania #debt #settlement

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