Consequences & Alternatives to Filing for Bankruptcy

Due to the severe consequences associated with filing bankruptcy, it's wise to consider all the possible alternatives before filing a case. Bankruptcy helps if you're overwhelmed with debt. It can wipe away present debts and give you the opportunity to rebuild your credit with a clean slate. Unfortunately, the rebuilding process can take several years.

Damage to Credit Report

The repercussions of filing bankruptcy include a damaged credit report and score. Bankruptcy can reduce your personal score by 100 points or more. With a bankruptcy staying on your credit report for 10 years, any creditor reviewing your report will see your past mistakes and think twice before extending you credit.

Credit Rejections

Buying a home or financing an automobile after a bankruptcy is challenging. You'll have to deal with specific auto lenders who work with bad credit applicants.

If you have plans to purchase a home, a bankruptcy on your credit file will result in postponing the purchase for at least two years after your discharge and after you've regained some of your lost points.

Higher Interest Rates

Getting approved for new credit after a bankruptcy helps rebuild your credit history. Unfortunately, getting new credit may require talking with different creditors and lenders until you find one that's willing to extend financing. Once you've secured financing, you'll likely pay a higher interest rate on credit cards or loans due to your past bankruptcy. This increase in interest rate can significantly increase your monthly payments on new debt and limit your purchasing power.

Debt Elimination Plans

Developing a strategy to eliminate debt can help you avoid a bankruptcy. Yes, bankruptcy often provides a quick fix to excessive debts. The long-term consequences, however, are worth exploring other options for managing debt. Debt elimination is a gradual process, and simple maneuvers such as making higher payments each month and stopping credit card use can slowly put a dent in your balances. Taking a second job to create extra income also helps bring down balances fast, as does negotiating a lower interest rate on your existing debts. Be patient, it can take years to completely pay off your balances. Consider asking creditors to settle your debts for less than you owe on the account to help you avoid a bankruptcy.

Consolidation

Debt consolidation can help you manage your debt without filing bankruptcy. Several methods are useful for consolidating debts. Owning a home opens the door to home equity loans or home equity lines of credit, which lets you acquire a lower-interest rate, fixed loan using your home as collateral. Another option includes employing the help of a debt or credit counselor to negotiate better interest rates and combine your outstanding balances into one bill payment. Programs of this nature not only help eliminate debt sooner, but they teach you how to budget and manage debt better.

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If I Live & Work in Texas Can They Garnish My Wages?

Ordinarily, when a creditor wants to recover an unpaid debt from a debtor via wage garnishment, he must file and win a lawsuit and then seek approval to garnish wages from the court. A few states do not permit creditors to garnish wages from individuals who live and work in the state. Texas is one of those states.

Determination

The state of Texas does not allow an employee's wages or salaries to be garnished by Texas creditors or ordinary debt collectors. To recover unpaid debts, creditors have to apply other methods, such as a bank account garnishment, which requires the debtor's bank to deduct monies deposited into her account and pay it to the judgment-creditor. To obtain the right to garnish a debtor's bank account, the creditor must first win a judgment then obtain the court's approval to garnish.

Exceptions

Though creditors usually cannot garnish a Texas debtor's wages, an exception applies to child support and federal tax levies. An employer can withhold up to 50 percent of a debtor's disposable income for child support; disposable income is the employee's pay after legally required deductions. An IRS tax levy withholding depends on the amount of the employee's pay that is exempt from the levy. A child support withholding order must be court-ordered to be valid. The IRS can issue a wage levy without a court order, provided it sends the taxpayer the required notices prior to doing so.

Domestication

If you live in Texas and are paid in another state that allows wage garnishments, a creditor can obtain a judgment against you in Texas and domesticate it in the state you are paid and garnish your wages there. If you live and work in Texas and owe an out-of-state creditor money, the creditor can obtain a judgment and enforce it via garnishment in its own court. In both cases, the garnishment laws of the other state apply.

Considerations

Besides wages and salaries, other types of income are exempt from garnishment in Texas. This includes Social Security benefits, many pensions plans, public assistance, such as unemployment benefits, workers' compensation, and some insurance and annuities plans.

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Disadvantages of Self-Consolidating

Debt consolidation is the process of bringing several high-interest debt accounts under one low-interest loan. People unfamiliar with consolidation may choose to speak to a debt consolidation professional. Those who have confidence in their ability to deal with financial matters may decide to create their own consolidation plan. There are some disadvantages to self-consolidating that the do-it-yourself financial planner should be aware of.

Recognizing Tax Advantages

Depending on the method you choose to consolidate your debt, you may be entitled to tax benefits. If you are not a trained financial planner or debt consolidation specialist, you may miss this opportunity at a tax break and create a plan of your own that you will be obligated to for years that offers no tax benefit. For example, when you use a home equity loan or line of credit to consolidate your debt, you can write off the interest you paid and reduce your taxable income, according to online financial resource Financial Web. There could be several tax breaks available to you when you consolidate that a financial professional would be able to recognize but that you may miss on your own.

Understanding the Process

In order to maximize debt consolidation, there are procedures you should follow. For example, prior to applying for a consolidation loan, you can help yourself by gathering all of your bills together, creating a list of the debt you owe and paying off the accounts that are within your means. You should also order copies of your credit report to make sure that there are not any older outstanding accounts that need to be satisfied along with the accounts you currently pay. This will allow you to consolidate all of your outstanding debt without leaving old unpaid accounts behind to drag your credit score down. Debt consolidation is a process that involves many steps and, without the guidance of a professional, you may leave out steps that will come back to affect your credit later.

Maintaining Control

According to online investing resource Investopedia, part of the debt consolidation process is getting your spending under control. It is not enough to consolidate your debt under one account; you must also take necessary measures to prevent your debt from piling up and becoming a problem again. A debt consolidation professional understands the difficulties in curbing credit spending, and an expert can help you create a plan that will prevent your debt from getting out of control again. Without the guidance of a debt professional to help you through the entire process, you may be tempted to run up debt on your credit cards again and require a second consolidation loan before your first one is paid off.

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How Can You Put a Loan on a Credit Report?

It's possible to add loan information to a credit report, but it may take some effort to convince credit bureaus to do so. It's worth the effort if you have a good payment history on a loan that doesn't appear in your credit file. In that case, adding the loan to your file could help you get other loan and credit accounts.

Process

According to the U.S. Federal Trade Commission (FTC), consumers can ask the national credit reporting bureaus to add favorable loan and credit information to their credit files. The major national credit bureaus are Equifax, Experian and TransUnion. People who are trying to improve their credit ratings could benefit from getting positive account information added to their files, but credit bureaus aren't obligated to make such additions. You likely will need to pay a fee to any bureau that agrees to add the information to your file.

Documentation

The Nolo law information website suggests sending copies of canceled checks, a loan contract and other documents to the three national credit bureaus to show you made on-time payments on a loan. The documentation helps the bureaus verify whether it's a legitimate loan. The lender also might be willing to write a letter attesting to your good payment history. For instance, some people finance their houses through private owners instead of through banks. In such cases, the original property owners may be willing to help you get the loan added to your credit history if you made your payments to them on time.

Fair Credit Reporting

The three national bureaus don't promote adding loan information to credit files on their websites. Contact their customer service departments to determine the fees they charge to add the information. Experian and the other companies provide information on why some accounts don't appear in consumers' credit files. The Experian website states the U.S. Fair Credit Reporting Act doesn't require businesses to report account activity to all three national credit-reporting companies. Therefore, businesses may report to one or two of the bureaus or none at all. According to Nolo, you can still include your loan information on a credit or loan application even if you can't convince the credit bureaus to add the loan information to your credit file.

Considerations

You may have several credit and loan accounts that don't appear in your credit file. According to the FTC, some local retailers and credit unions don't report consumers' account activity to credit bureaus. Gasoline credit accounts and accounts with travel and entertainment companies also may not appear in consumers' credit files.

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Who's Responsible for the Remaining Balances on Credit Cards Upon Death If There Is No Estate?

When a consumer dies without paying off his credit card balance, the credit card company he owes files a claim against the deceased's estate with the probate court. The probate court then distributes the deceased's remaining assets accordingly. If an individual dies with more debts than assets, however, he is "insolvent" and has no estate. Thus, the credit card company cannot file a claim for payment.

Additional Cardholders

When two people share a joint credit card account, both also share the burden of repayment. Should one cardholder die, the surviving debtor is responsible for paying off the credit card balance---regardless of whether or not she made the purchases. In this case, the deceased's lack of an estate is irrelevant. The credit card company will pursue the surviving cardholder for payment in full.

Family Members

If the deceased consumer was married and incurred the balance during his marriage, his spouse could be responsible for repayment depending on where the couple lived. If they lived in a community property state, the assets either spouse accrues during the marriage belong to both individuals equally. While community property laws differ in each community property state, a creditor can use the state's community property statute to pursue the surviving spouse for payment.

Unless a child or extended family member held a joint account with the deceased, the credit card company cannot hold any family member other than the deceased's spouse liable for paying off the card's remaining balance.

Tax Write-off

If the credit card belonged to the deceased alone and she did not live in a community property state, the credit card company can request that the deceased's family pay off the balance, but cannot force them to do so. The credit card company can, however, write off the balance the deceased owed at the end of the year. The Internal Revenue Service allows businesses to deduct the amount of any uncollectible debt from the company's taxable income---reducing its overall tax liability for the year.

Collection Activity

Credit card companies sell unpaid debts to collection agencies in batches. Sometimes credit card companies benefit more from continuing to try to recover the unpaid balance than from writing it off as a business loss. When a collection agency purchases the account, debt collectors will contact the deceased's loved ones and demand payment. While the surviving family members are not legally responsible for payment, sometimes they will pay off the balance simply as a respectful gesture for the deceased. Should this occur, the collection agency keeps a percentage of the payment while the credit card company receives the remaining funds.

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How to Do a Settlement on a Judgment

Judgments are derogatory marks on a credit history. Judgments occur when an account nears the statute of limitations to recover debt in that state and after a creditor wins a lawsuit guaranteeing payment on defaulted debt. If the borrower does not have liquid means to pay the debt, the judgment automatically becomes a lien on any owned property. When this happens, judgments are paid and settled upon sale of that property. However, even after the gavel falls on a judgment, it is possible to resolve it with the creditor for pennies on the dollar.

Instructions

1

Write a letter to the judgment creditor offering a settlement. Ask whether they will accept 50 percent of the judgment balance in exchange for clearing the court judgment and marking it as paid on your credit report. You want to avoid phone calls with judgment creditors; it is best to keep all communication in writing. Wait at least 30 days to hear back from the judgment creditor after your first letter. They will respond either with the consent of the settlement offer or with a counteroffer.

2

Respond to the letter you receive from the judgment creditor, either with a letter confirming acceptance of payment terms or with a counter to their offer. It is crucial to note that you may need to complete several counteroffers before you reach an agreement. In most cases, a lump-sum payment will fare more favorably on your behalf in a settlement offer, as opposed to payment arrangements. Your response letter needs to require a signature from a representative of the judgment creditor agreeing to the terms of the settlement agreement. Do not remit payment until you have a signed copy of this letter in hand.

3

Get a cashier's check or money order for the previously agreed amount. Send the payment via certified mail, along with confirmation of the terms and a copy of the letter the judgment creditor signed. Once you confirm the creditor received payment, follow up with the county clerk's office for verification of the cleared judgment within 30 days. Also, follow up on your credit report to ensure that the judgment is marked as paid. If the judgment creditor did not follow the terms of the agreement, it might be time to hire legal representation.

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DIY Debt Settlement

Debt settlement should not be used as a tool to get out of your debts, as there are credit consequences and there can be legal consequences as well. But it can be helpful for those who cannot pay their full debt and who also want to avoid bankruptcy. Because hiring a debt-settlement firm can cost you thousands of dollars in unnecessary fees, you might be better off making the settlements yourself and saving the money to help pay your settlements.

Stop Paying and Save

To get a lender to agree to a debt settlement, you need to have money to offer, according to Bankrate. A lender is not going to make a settlement and give you months to pay it off; it is going to want its money within days. Therefore, you should stop paying the bill you want to settle and start saving money to pay that settlement. Keep in mind that there will be a time constraint once you decide to stop paying this bill. After 120-180 days of non-payment, lenders usually charge off a debt and hand it over to a collector. You can also settle with a collector, but that money will not go to your original lender. If you want to have your money go to the original lender, you should have the money saved up for a settlement within six months.

Initiate Contact and Make Your Offer

You need to let the lender know your situation and that your only options are settlement or bankruptcy, according to Charles J. Phelan of ZipDebt. Ignoring the lender's calls until you are closer to charge-off might make a lawsuit more likely, especially if your debt is large. Talk to the lender, but let it know you cannot accept a payment plan and that you need a settlement. You might have to have this conversation several times in the months leading up to your charge-off, but as that date approaches the lender might be more willing to compromise.

Get It in Writing

Once the settlement has been agreed upon, do not pay immediately; instead, you should ask the lender to send you a copy of the agreement on its letterhead, according to Jeff Boulton of RiseAboveDebtRelief. Make sure that the agreement states that the debt will be discharged once the settlement amount has been paid and that it also states the settlement amount. Write a check instead of allowing the lender to take the funds from your bank via electronic transfer. Keep the canceled check in a file with your settlement papers.

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