While some think the only way out of serious debt is through bankruptcy, several other options may be available that could bring enough financial relief to get through it to a healthier financial place. While consumer or reorganization bankruptcy is a good option under certain circumstances, the decision should be carefully made considering all other potential legal remedies.
People find themselves facing mountains of debt for many reasons, including:
- Loss of employment
- Death of family member
- Medical bills
- Credit card reliance or overuse
- Divorce
- Student loans
- Natural disaster
Whatever the situation was that brought someone to this challenging place, weighing all options is advisable, and many involve negotiation with creditors. Being open with the creditor about the personal circumstances that led to the financial crisis may be helpful along with the debtor’s commitment to satisfy the debt despite the challenge.
Renegotiation of terms
A creditor may be willing to consider a workout agreement in which it agrees to adjust the terms of the debt agreement to accommodate a debtor’s request for relief in their effort to satisfy the debt. For example, the creditor may agree to lower payments by extending the term of the loan to spread repayment over a longer time period, lowering the interest rate or waiving fees.
Alternatively, the debtor may be able to negotiate a forbearance or deferment, legal vehicles allowing the debtor to take a break from making payments for an agreed-upon period. The creditor does not cancel the payments – just postpones them – but it may create enough time for the consumer to get more centered financially. This option may require agreement to other kinds of term adjustments. For example, will the creditor continue to charge interest during payment suspension?
In exchange for these kinds of accommodations, the creditor may require that the account – if it is an ongoing credit line – be closed. But it still may be a good resolution for the debtor.
Debt settlement
It can be wise financially and often stress reducing if the debtor can negotiate a debt settlement. In this scenario, the debtor and creditor come to agreement in which the creditor reduces the dollar amount of the debt in exchange for the debtor paying that amount in full up front in a one-time, lump-sum payment. The creditor is guaranteed to get an amount of money for the debt that may not materialize if the debtor continues to struggle with payments and while the debtor may be challenged to come up with the payoff amount, it will release them from the obligation and its financial pressure.
A variation on this approach for the creditor to lower the amount due to decrease the payments, making them more affordable.
A creditor will recognize that sometimes collecting only part of the debt is better than letting the debtor default. Should part of any proposal be for the creditor to forgive part of the debt, the debtor should consider the tax consequences since this may create income tax liability for the debtor’s resulting financial benefit.
It should be a conscious decision whether to approach negotiation with the creditor before or after the creditor has referred the matter to a debt collector, weighing the negative impact on the debtor’s credit score against the likely overall savings from a discounted settlement.
Careful considerations
A debtor should thoroughly investigate the options for debt renegotiation or settlement as well as other approaches to unmanageable debt. For example, does the consumer have a relationship with a bank that may be open to a low interest loan the borrower could use to pay off debts and consolidate them into that more affordable personal loan?
There could be other remedies to the situation that involve illegalities in the debt agreement, in the creditor’s behavior in trying to fulfill the agreement or to collect the debt, or in a debt collector’s actions. Significant, additional legal defenses may exist against the creditor’s attempt to collect.
Finally, beware of unscrupulous entities calling themselves debt relief agencies that offer to settle your debts for high fees and tell you to stop making payments. You could end up in an even worse place.
Whatever your situation, know that there are likely other solid legal alternatives to bankruptcy to consider first. If you need help in reviewing these alternatives, please call us for a consultation.