Get Out Of Debt

Debt consolidation and consumer credit counseling are both ways of eliminating your debt. Consumer credit counseling is actually a form of combining your bills, but it does not involve a loan. Sometimes the term debt consolidation can also refer to a home equity loan that is used to pay off outstanding obligations. Consolidating your bills refers to a solution that consolidates your debts and allows you to make one monthly payment to cover all your debts.

A debt consolidation loan is a viable means of paying off your debt, but I do not recommend it. If you have credit card debt or are enrolled in credit counseling and do nothing, your creditors can report you to the credit bureau and make numerous collection calls, but that is about it. However, if you have a debt consolidation loan and cannot make the payments, the consequences are much more severe. Your creditor can start foreclosure proceedings on your home. Many people have debt consolidation loans, but there are better ways.

Consumer credit counseling is a form of consolidating your debts, but it does not require a loan. Debt counseling is a way for people to get out of debt without incurring additional debt. A debt management agency can help you get on a plan that will help you have your unsecured debts paid off in five years or less. If it takes longer than five years, you may want to consider other debt relief options.

Your credit counselor will interact with you lenders and they will no longer be allowed to make collections calls to you as long as you follow the terms of the plan. There are many benefits to debt consolidation with a debt service. Here are just a few of the benefits you will see by consolidating with a credit counseling agency:

*Reduced and possibly eliminated interest rates
*One convenient payment each month
*No more collection calls
*No more fees
*Budgeting and financial education resources

The biggest part of being successful with a debt management plan is not getting into something that you don’t think you can manage. If you are given a quote that you don’t think you can handle, you are setting yourself up for failure if you accept the proposal.

Debt relief is something you need to go into with an open mind and the attitude that you are going to do what it takes to become debt free. The most difficult part of getting out of debt is recognizing that there is a problem and asking for the necessary debt help.

A Chapter 7 bankruptcy petition is a liquidation (sale/disposition) of a debtor’s nonexempt property to generate cash for creditors in exchange for a discharge of all dischargeable debts.

A debtor has a “no asset” estate if the scheduled or recoverable assets, less encumbrances (balance of loan(s), judgment lien(s), etc.) and exemptions, equals no funds for creditors.

Such a debtor will be discharged from dischargeable debts, after filing of a “no asset” report by the trustee and issuance of a discharge order by the Bankruptcy Court. The case is subsequently closed as a matter of ministerial act.

Eligibility for Chapter 7 Petition:

Unlike a Chapter 13 petition which has limits on the amounts of unsecured and secured claims for eligibility, a Chapter 7 petition has no such limitations. But a Chapter 7 individual debtor must have a domicile (residence), a place of business, or property in the United States, under 11 USC § 109(a).

Moreover, U.S. citizenship and financial distress are not required for Chapter 7 eligibility. But a Chapter 7 debtor is not eligible to receive another discharge in a Chapter 7 bankruptcy case during the eight-year period after the filing date of the prior Chapter 7 petition, under 11 USC § 727(a)(8).

An individual debtor is required to receive credit counseling briefing from an approved credit counseling agency during the 180-day period before filing the Chapter 7 petition. The briefing may be delayed for 30-days, (and even up to 45-days, if approved by the Bankruptcy Court), after the Chapter 7 filing date, if there are “exigent circumstances” that merit waiver of the briefing and the debtor was unable to obtain a briefing within 5 days from request.

It has been held that emergency filing to stop foreclosure sale is not “exigent circumstance,” excusing compliance with the credit counseling requirement. After filing a Chapter 7 petition, the debtor is required to attend a financial management course, after the section 341(a) meeting of creditors.

The filing fee for a Chapter 7 petition is $299.00, payable to the U.S. Bankruptcy Court.

Means Test To Determine Abuse:

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) instituted the “means testing” for individual Chapter 7 debtors to determine dismissal for abuse, in 11 USC § 707(b)(2). It is also used to determine “disposable income” in Chapter 13 petition for repayment to creditors and the length of the period of the plan.

The basic “means test” formula triggers the presumption of abuse in a Chapter 7 individual debtor whose debts are primarily consumer debts, if the debtor’s current monthly income, reduced by allowable monthly expenses (IRS’ National and Standards: http://www.irs.gov ) and multiplied by 60, is not less than the lesser of: (a) the greater of (1) 25 percent of the debtor’s nonpriority unsecured claims in the case; or (2) $6,000.00; or (b) $10,000.00.

If the means test applies and the presumption of abuse arises, the Bankruptcy Court may dismiss or convert the Chapter 13, unless the debtor can rebut the presumption by establishing special circumstances, such as call to Armed Forces active duty or serious medical conditions, justifying additional expenses or adjustments of current monthly income.

But if the debtor’s and spouse’s current monthly income multiplied by 12 as of the Chapter 7 filing date is equal to or less than the state median family income ($46,814.00 for 1 earner, $61, 742.00 for 2 people, $66,611.00 for 3 people, $76,931 for 4 or more people in California) based on the debtor’s household size, then the means test does not apply. And there is no standing to bring a motion to dismiss/convert, under 11 USC § 707(b)(2).

California Exemption Law:

With the California Legislature opting out of the federal exemptions in 11 USC § 522(d), individual debtors residing in California may choose between the so-called “703-series” or the “704-series” exemptions, the amounts of which are adjusted effective April 1 every three (3) years by the Judicial Council.

Some of the amounts of exemptions under the “703-series” are: real or personal property homestead – $20,725.00, motor vehicle – $3,300.00, clothing/household goods/appliances – $525.00 per item, jewelry – $1,350.00, personal injury recovery – $20,725.00, tools/books of trade – $2,075.00, and unmatured life insurance – $11,075.00.

And some of the amounts of exemptions under the “704-series” are: real or personal property homestead – $50,000.00, if single, $75,000.00 for family, $150,000.00 if 65 or older, motor vehicle – $2,500.00, jewelry – $6,750.00, personal injury recovery – amount needed for support, tools/materials – $6,750.00, and matured life insurance – $10,775.00.

The series most advantageous to the debtor depending on his or her circumstances should be used in the Chapter 7 petition.

Automatic Stay And Relief Therefrom:

The filing of a Chapter 7 petition results in stopping all collection efforts, all harassment, and all repossession and foreclosure actions by creditors against the debtor and the debtor’s property, until: (1) the stay is lifted by a Bankruptcy Court order, (2) the stay terminates or is ineffective, and (3) the case is closed or dismissed.

Creditors may seek relief form automatic stay to: (1) foreclosure or real estate collateral/ security interest, (2) repossess personal property as security for delinquent loan(s), or (3) continue litigation in another case stayed by the filing of the Chapter 7 petition.

Common grounds for relief from automatic stay are: lack of adequate protection of an interest in property, debtor has no equity in the property, or the property is not necessary for an effective reorganization.

Thus, Chapter 7 petition cannot prevent the foreclosure of the principal residence of the debtor, which is the collateral/security interest for a purchase money loan, as stated in the recorded deed of trust.

Discharged And Undischarged Debts:

A Chapter 7 discharge order by the Bankruptcy Court eliminates a debtor’s legal obligation to pay a debt that is discharged.

Some debts are, however, not discharged in a Chapter 7 bankruptcy case, to wit: most taxes, domestic support obligations, most student loans, most fines, penalties, or criminal restitution obligations, debts for personal injuries, death caused by driving under the influence, debts not properly listed in the schedules, debts decided as not discharged by the Bankruptcy Court, debts that are properly reaffirmed, and debts owed to certain pension, profit sharing, other retirement plans.

As of the moment we are in the midst of a pretty bad economic recession. People have been losing their jobs, businesses have been going under, and we are hitting record numbers with home foreclosures. To top all of this off we are seeing American consumers hit a record high with credit card debt. Now what most people do not know is that getting out of debt is not all that hard if you take the right steps.

For starters most people do not know what options they have available to them in order to get out of debt, however before going into any of those options debtors must be made aware that pretty much anything they do to get out of debt will have a negative credit effect. Unless the debtor has the money to pay off the debt in full, which ninety nine percent of people do not. The number one priority when trying to get out of debt should be exactly that, getting out of debt, not worrying about keeping a great credit score. A credit score is something that changes like the wind and can be repaired at a later date, and besides when you’re in debt you should not be worrying about how to get yourself into more debt in the future.

With that being said there are two main debt relief programs available to people trying to get out of debt. There is consumer credit counseling and there is debt settlement. Both have their respective pros and cons.

A credit counseling program is one that boasts the benefits of reducing interest and consolidating payments into just one. So instead of making numerous payments throughout the month to your creditors you just make one to the credit counseling agency and they will pay the creditors for you. Plus the creditors will lower the interest on these types of plans. The problem is that for many people the payments will still simply be too much. Often times the payments are just as much if not more than what people are putting out on monthly minimum payments.

With credit counseling people can look to get rid of their debt within 5-7 years and look to pay back around 135% of what they currently owe. Another issue with credit counseling is the low success rate, because if just one payment is missed often times the creditors will kick the consumer off of the program, thus bumping the interest back up. And yes there is a negative effect on the credit, a credit counseling plan will be shown as a code 7 on the credit report which looks bad. But the bottom line is to get out of debt and with this plan money and time will be saved when compared to riding out the monthly minimum payment scheme for what could be decades.

Now there is another debt relief plan called debt settlement. The benefits of this program are the savings of money and time. Most debtors find themselves saving around fifty percent of what they owe today, and can realistically get out of debt in just a few years. The downside to this program is that in order to achieve a debt settlement the consumer must let the accounts fall into default, thus putting the creditors in a position to negotiate a settlement. So obviously this will have a negative effect on the credit score. However once the settlements start coming in the credit score will rebound and repair itself naturally.

Right now with the state of the economy debt settlement has been a very lucrative debt relief method for many people. The creditors have been negotiating very low settlements, much lower than they do when the economy is doing better. Many people are finding they are saving a tremendous amount of money with this option and find themselves getting out of debt very quickly.

Like I said in the title, getting out of debt is not all that hard. The vast majority of people would be able to manage one of these two types of programs. The only thing that holds most people back is the apprehension of their credit score being affected. This is quite a shame that the creditors have so many people kneeling at the alter of FICO, that they do not realize they are losing thousands of dollars to the credit card companies with no end in sight. With the way things have been going in the economy people are going to need all the money they can get and throwing away money to high monthly minimum payments may be the straw that breaks the camels back for millions of American families and puts them into very precarious financial situations.

Bankruptcy, although necessary for many individuals, should be utilized as a last resort once all other options have been reviewed first. One of the first things that a person can do is review their own spending patterns or habits before seeking help. If acted upon before the problem reaches the point of no return it is conceivable that there may be no need for outside intervention.

There are several resources available online that are designed to help an individual create a household budget without any cost. Also most credit counseling agencies should be able to provide you with a household budget at no cost. There are also bankruptcy attorneys that will assist in this as well, however it is paramount that these services remain free of cost. Be leery of Credit Counselors or Bankruptcy Attorneys that charge upfront for assisting in the creation of a household budget, as it seems to me that if someone is willing to charge you in order to help you get out of debt on your own then it might be that there intentions go beyond wanting to help you and fall more in line with wanting to help themselves. Now don’t get me wrong, if there is a continual service that they provide then by all means there should be some fee charged.

So before attempting a “Do it yourself bankruptcy” you may want to seek advice from an actual Bankruptcy Attorney or a certified Credit Counseling Agency first. Just be sure that the initial advice is provided at no cost. Also if continual assistance is needed remember to shop around, fees for practically the same services can vary widely from one organization to another. Also make sure the organization that you choose to work with has the support services available to make your experience with them the best it can be.

Written by Rick Munster

I recently had the privilege of discussing credit card counseling with a local banker. Among the things he mentioned one of them stood out in the report. After review it became know that people in debt are seeking credit counseling programs to seek debt relief.

The problem however is the long time frame associated with the programs. The monthly payments remain the same as well causing the same issue to arise being the strain of the monthly payments on household budgets. Many people have even enrolled in CCCS programs paid the fees and then dropped out. This is where the problem lies.

Ethics should come into play in this scenario. When dealing with an indebted consumer many credit card counseling companies act like debt collecting sharks to gain enrollments. Pushing the consumer by pointing out the non-profit status of the company to enroll in the program. After this shaky enrollment process they deduct the first monthly payment that goes entirely to fees for the service.

If the next month the client fails to make a payment there is no follow up done to see why. The reason being that the credit counseling company is paid for and sponsored by the credit card companies themselves. The IRS has done much research into the non-profit CCCS programs but have had little success with completely eradicating predatory credit counselors. Additionally the credit counseling firm is paid a “fair share” usually between 7-12% of the debt directly back to the credit counseling agency.

Consult with a banker or an attorney to see if credit counseling or debt settlement is best for your financial needs.