Get Out Of Debt

Any person in their right mind does not want to file for bankruptcy protection. Having a root canal is several levels about that in terms of “things I want to do”. One of the big problems is that when someone finally gets around to admitting that their financial situation is so far down the wrong road that it is out of control, it’s almost too late. The decision to file bankruptcy or consider bankruptcy should have been made, with any foresight at all, at least 2-3 years earlier in most cases.

Sometimes the financial burden may have come about very suddenly, like a major medical expense that was not unexpected, or a job layoff with trouble finding a replacement job for an extended period of time.

There is no hard and fast rule about when a person should file bankruptcy. It varies from individual to individual, and every situation has its own specific quirks, so that one can say definitely that “one size does not fit all”. But one of the problems that happens when one starts looking to bankruptcy as a way out of their financial difficulties is that very traditional thinking starts to set in.

Traditional thinking about bankruptcy says that bankruptcy is an “easy way out” of one’s financial difficulties and overloaded burden of debt. You just file, the slate is wiped clean, and then life goes on, right? Dead wrong, especially with the new bankruptcy laws, which still vary widely from state to state. The new bankruptcy laws make it much more difficult to file for bankruptcy than it ever was in past years, and it is no longer just a quick trip to the courthouse with a couple signatures.

Today’s bankruptcy laws make filing bankruptcy a much more invasive procedure, where they look at every nook and cranny of your life and your finances to determine why this happened and what type of bankruptcy you are required to file. Bankruptcy used to be something that you could, with a good deal of study and patience, do yourself without the assistance of a bankruptcy lawyer, but that is no longer the case. The laws are now so complex that attempting bankruptcy without an attorney’s help would be foolish, as well as probably taking almost twice as long to accomplish, since if you incorrectly file one of the mountain of forms, you get sent back to square zero to start from scratch.

But is bankruptcy really necessary? In other words, what alternatives and options have you thoroughly looked into? Oh, you haven’t? Shame on you. Filing for bankruptcy protection is going to have long lasting negative effects on you. For example, it will appear as a huge red flag on your credit report for 7 years or more. Credit will be hard to come by, and when you are granted credit, the interest rate will be much higher than you have ever seen it before, because now you are labeled as a high credit risk.

One of the very viable bankruptcy alternatives is a debt consolidation loan. They don’t actually hand the money to you though. Rather, they take your outstanding and overdue accounts, and you pay one monthly payment to them, which they in turn divide up to send to your creditors. Your creditors are happier than they’ve been in years because now timely payments are being made, and you credit rating does not hit the skids, at least not completely, because you were able to avoid bankruptcy.

Check your alternatives and options before making such a critically important decision as filing for bankruptcy. You always have options, and the key to successful living is to acquire the knack for choosing the right one.

I have been in the credit card debt relief industry for just about 10 years now and have been in the financial industry for over 20 years. The point of this article is to give people a heads up on debt relief companies also known as debt settlement or debt negotiation companies. I will give you the pro’s and con’s of this process and what to watch out for when interviewing a company to help you get out of debt. Before I go on I want to let you know that this will be a rather long article and by the end of it my goal is to have you understand how the debt negotiation/settlement process works in case you don’t already know and I would like you to understand the tactics of companies out there that do not truly have your best interest at heart.

First I would like to state that the process of debt negotiation as your means of consumer debt relief is not for everyone, some people are better suited for bankruptcy and others do not have the correct mindset to go through this process.

I would like you to first understand what debt negotiation is and how it works. The goal of a debt negotiator is to obtain a debt settlement for you on the current debt amount you owe your creditor. So for example you may owe one particular creditor $10,000 so the goal of the negotiator would be to have you end up paying back say $6,000. The two main benefits of going through this process are to save money on what you currently owe your creditors and to save time. By just paying the minimum payment with even a modest interest rate you will be looking at 30 or more years to become debt free, with a sound debt negotiation program you will be out of debt within 2-3 years or sooner depending on your current financial situation.

Now you must understand these are great benefits but as with anything in life there are drawbacks, nothing is perfect and this consumer debt relief procedure is no different. For starters your creditors will not be willing to negotiate a debt settlement at all if you are current with your monthly minimum payments. They would prefer you to stay on their credit treadmill for the next thirty years and pay them back over four times the balance in interest alone. So you must fall behind on your payments to put the creditors into a position where they will be willing to settle. Once you stop paying them the ball game changes completely and they will then be willing to talk in terms of negotiating a settlement.

So obviously for some people the beginning of this process will have a negative effect on their credit score. For those who are already falling behind then the negative effect will be no different than it already is. Unfortunately for some people this will be the deterring factor that keeps them from going into debt settlement making them a slave to their creditors for the next thirty years. The good news is that this negative effect does not last forever, in fact once the settlements start coming through your credit score will begin to rebound and go back up. The reason being over 30% of your credit score according to MyFICO is based on how much debt you owe. But if you are stuck in a bad debt situation even if you are current with your payments your score is probably not all that good in the first place, and besides when stuck deep in debt your focus should be on how to get out of debt as quickly as possible, not on your ability to accrue future debt.

Now by falling behind on your debts you must understand that these creditors are just not going to roll over and play dead, they will be calling to try and collect the debt. For some this is not a problem at all, for others it is, that is why I stated above this process is not for everyone and the consumer must be in the correct mind set. From my years of helping people there is no rhyme or reason to how many calls you will receive some clients of mine barely get calls while others get them almost everyday. Something to keep in mind too is that no company has the power to legally stop the calls, so any company that tells you they can is flat out lying.

As you can see like I said earlier there are pro’s and con’s, but if you can accept the con’s you will be quickly on the road to financial freedom and will save a lot of money in the process. Now to get to the meat of the matter and why I named this article “consumer credit card debt relief scams”.

We here in America over the past couple of years have been experiencing a very negative downturn in our economy. Thus putting many consumers in a compromising position financially, leaving boat loads of people stuck in credit card debt. So naturally this opened up a much larger market for debt negotiation. Many fly by night companies have been popping up all over the country, many of which are ex mortgage brokers who sold people bad loans and helped them get into this sticky position in the first place. Now I use the word scam which can take on a few meanings, while yes there are some companies out there that are flat out scams and have no intent on doing any work for you at all, most of the times that is not the case. Instead many companies simply do not give people all the facts on how debt negotiation works nor do they truly put them on a plan for success, which I will explain in a minute.

One common issue that most consumers have with debt settlement companies is they do not fully tell them about how the process works, instead they sugar coat things and just preach about the great benefits. I have spoken to countless amounts of people who have signed up with companies and were under the impression that they were going to stay current with their creditors and will never receive any calls. So needless to say this became a huge problem once they began.

Another major problem a lot of these companies have is deceiving people into the kind of savings they will be getting on their debts. Some companies will say they will save you 70% of what you owe. Now while they may get settlements that low what their opting not to tell you is how much you will be saving after you have A) paid them their fees, and B) paid back the creditors. Honest companies will tell you what your true savings will be. If you will save somewhere between 40-50% of what you owe including their fees and paying the creditors than that is pretty darn good. Plus many of these companies will try and guarantee a certain amount of savings, if you hear this run for the hills. NO one in this industry can guarantee a certain amount that is why it is called DEBT NEGOTIATION! They are negotiating to get a settlement for as low as they can get.

Then there are the companies who will let you pay whatever you can to get on their program. These are the worst because they do not truly have your interest at heart and know they are setting you up to fail and not succeed. You must understand to achieve the type of savings I stated above this process should take no more than three years, preferably two or less. And the bottom line is some people simply cannot get it done in that time frame and should realistically be looking into bankruptcy. What these unscrupulous consumer debt relief companies will do is put you on a program for 4 or more years and basically accepts whatever payment you can afford. Knowing full well you are not going to be saving much of anything and will more than likely fail off the program, all they care about is getting the fees and that is it. An honest company will diligently review your budget with you and make sure this is something that you can manage, as well as fully explain to you both the benefits and drawbacks of doing this. And let you make the conscience decision as to whether this is the best consumer debt relief method for your situation.

Another very good way to evaluate a company is to make sure they are registered with the BBB (Better Business Bureau) and that they are in good standings with very few complaints. And if there are complaints make sure they were resolved to the clients liking.

You’re in serious debt. You owe a number of creditors and have no hope of paying them. The worst part is one of your creditors is the most powerful collection agency in America…the Internal Revenue Service.

A fateful decision…You’ve decided to declare bankruptcy, and while going through your creditors you wonder if the IRS can be included. The IRS has a number of rules and restrictions on including an IRS debt in a bankruptcy. Not only that, but you’re not completely free of IRS collection actions while you’re in bankruptcy.

Let’s go through the life cycle of an IRS debt and a bankruptcy:

Can you include your IRS debt in a bankruptcy? Yes, but your debt has to meet 3 standards. If it doesn’t meet even one of them then you’ve got to figure out another way to pay the debt. The 3 standards are:

1. You can not include any tax debt that is less than 3 years old. So if your tax debt is from last year it can’t be included.

2. You can not have any unfiled tax returns.

3. You can not have any tax returns that were audited because you committed tax fraud.

One down…Let’s say that your IRS debt meets the requirements and you can include it in your bankruptcy; now what? The IRS can’t take any collection action against you while you’re in bankruptcy under the Automatic Stay of Collections.

There is a loophole for the IRS if you’re a serial bankruptcy filer. If you’ve filed bankruptcy and it had been dismissed within the last year the IRS only has to abide by the Automatic Stay for 30 days. If you’ve filed two bankruptcies then the IRS can ignore the Automatic Stay.

Do they ever quit? While the IRS can’t collect from you here’s what they can do: The IRS can perform an audit to determine your tax debt amount. The IRS can send you an annual notice stating your debt amount. The IRS can take any tax refund you would have due and apply it to your debt, or if you have a trustee handling your bankruptcy the refund goes to them to be distributed to your creditors.

An end in sight…What happens to your IRS tax debt after the bankruptcy is discharged. If your tax debt was included and discharged then the debt is non collectible. But wait; remember those 3 standards for including a debt in bankruptcy. Any tax debt that happened because of one or all of those reasons is still eligible for collections. In addition interest and penalties have accrued on that portion of the debt during the time you were in bankruptcy.

The IRS and bankruptcy do not go together, but if you know your rights you can make the decision you need about your debts and be able to get your life back on track.

Now you have the smoking gun…Use it!

Debt piled on debt… Once upon a time claiming bankruptcy was like a “get out of debt free” card. Those days are long gone, and getting a bankruptcy discharged is much harder now. But if you really want to complicate an already complicated process then try to include an IRS tax debt into your bankruptcy.

You can’t get off the hook that easy… Although an IRS debt can be included in a bankruptcy, it is very difficult. There are a number of factors that contribute to a tax debt not being able to be included. On top of that bankruptcy attorneys are not very experienced at tax law, and can easily make a mistake that won’t allow your tax debt to be considered.

Pulling back the curtain… I want to help you understand what requirements there are, and give you an alternative to dealing with your tax debt outside of bankruptcy.

So how do you get an IRS debt included in a bankruptcy, and what are some of the problems with including an IRS debt in a bankruptcy?

You can not include any years that you owe tax debt which are more recent than 3 years ago. That means if you’re filing bankruptcy in 2008, the latest year that you could claim back tax debt from would be 2005.

Even though the IRS can’t pursue any collection actions against you during the period you’re in bankruptcy the interest and penalties continue to add onto to the debt during the time it takes for the bankruptcy to be processed. And if your bankruptcy is dismissed, you’ll owe all that money to the IRS.

The time spent in bankruptcy extends the Statute of Limitations on the debt. Normally the IRS only has 10 years to collect a debt from you. But the length of time you were in bankruptcy extends that time period.

There is an alternative… What else can you do with an IRS debt if you can’t get it discharged in a bankruptcy? Since you’re filing bankruptcy you’re in a pretty desperate financial situation. This can make you a prime candidate to settle your tax debt with the IRS outside of bankruptcy.

It’s not all bad news… You may qualify for an Offer in Compromise depending on how damaged your financial situation is. With an Offer in Compromise you can negotiate with the IRS to get your debt settled for a single lesser payment. An Offer can take as long as a bankruptcy to be approved and it does have a much lower chance of succeeding; in fact only 2% of Offers are accepted. To learn more about the specifics and requirements for an Offer in Compromise read my article “Settling Your IRS Tax Debt for Pennies on the Dollar”. Also talk to your bankruptcy attorney.

Now you have the smoking gun…Use it!

In 2005, the average American had $8000 dollars of just credit card debt. Of course, the total amount of debt was much higher once you consider a mortgage, personal loans, home equity loans, student loans and a few bucks from mom and dad. Most people have more than one and in some cases a wallet full of the plastic cards. $8000 is a mountain of debt that most people can barely make the minimum payments on let alone try to figure how to get rid of it. Lets look at some options that will help you eliminate that debt.

Adjusting your payments on a credit card can affect your financial picture in the long term. The minimum monthly payments on credit cards use to be 2% of your total debt. If you have $8000 of debt and you are paying the 2% minimum or $10 which ever is more, prepare to pay that card off for 54 years and accumulate $23,000 in interest. The first payment would be $160 and it would trickle down to $10 as you paid the minimum each month. This calculation is based on an 18% interest rate. If you could maintain that payment of $160 each month, you could pay of the same credit card off in just under 8 years and pay less than $7000 in total interest. Just by maintaining your payment, you can see how you can eliminate much faster.

Credit card companies have doubled the minimum payment to 4% now. This has caused some people to file for bankruptcy since they could barely afford the 2% minimum. Now you have to pay $320 instead of $160 if you are the average American. If you can afford to pay that amount, it will take you less than 3 years to pay it off and expect to pay $2000 in interest. By doubling the minimum payment, you can pay it off much more quickly.

Let us also look at interest rates. It is easy to forget to look at the interest rate when making any financial decision. If you have several federal student loans accumulating interest at 3.5% and you have an equivalent amount of money in the bank, most would want to take that liquid money and pay off the student loans. This would be a mistake because you forgot to look at interest rates of investments. If safe and secure bonds are paying you 5% and you are only losing 3.5% on those loans, please do not pay it off. You can invest and pay the minimums on those student loans and capture that 1.5% interest difference. The same goes for credit cards. Pay off the ones that are higher first. If you have multiple cards, pay the minimums on the lowest interest cards and put the rest towards the highest. Once the highest interest rate credit card is paid off, figure out which card has the next highest interest rate and repeat. Do this until you are down to one card and you should be paying that off quite fast if you do not decrease the total amount that you are putting towards your credit cards each month.

As you can see, the more you pay per month will have an astounding effect on your total payments in the end. The first step is to budget yourself so that you can stop using credit cards, the next is to figure out how much you allocate to paying them off each month. Start by being aggressive on the highest paying cards and work your way down. The effects off paying off that debt will help you breathe easier and know that you are back on the right track.