Chapter 7, Debt Consolidation, or….Nothing?

During an initial consultation, I am often asked what I think about debt consolidation companies and the services they provide. The short answer is that I think those services are generally a bad strategy. They damage someone’s credit similar to a bankruptcy filing, but the client doesn’t get the advantages provided by the bankruptcy court: no discharge, no automatic stay, and no peace of mind.
In bankruptcy, the court provides a definitive structure for getting rid of debts. During debt settlements, on the other hand, you pay a company to negotiate with your creditors on your behalf. The creditors are not forced to agree to anything.
Frequently, the conversation on whether filing is a good idea boils down to either a Chapter 7 case or doing nothing at all.
If a client is unable to pay unsecured debts (medical bills, retail charge accounts, credit cards, etc.), and does nothing about it, the creditor’s remedy is to sue and obtain a judgment. Even with a judgment, however, the creditor still cannot get any money from the debtor unless there is property for the county sheriff to sell. Further, people in North Carolina have exemptions which protect certain property from judgment creditors. If all of someone’s property is protected by the exemptions, the creditors cannot collect on their judgment.
So why would someone still want to file for bankruptcy if creditors can’t collect? In most situations, there are two good reasons. First, the rules of bankruptcy were established so people would have another chance to work hard and succeed. The idea is that they should be able spend their hard-earned money on whatever they see fit going forward.
If a client does nothing about debts, any property they obtain in the future might be subject to the judgment creditor. So, if a debtor paid down their car loan, inherited money, or saw their home increase in value, their property would be subject to seizure by their creditors.
Second, most people like to live without the stress of creditors constantly investigating what property they own, calling and harassing them over the phone, and sending threatening letters. Bankruptcy relieves this stress by defining a plan to succeed financially.
I enjoy showing people the positive effects of the bankruptcy court in an initial consultation. Once my clients know their options, whatever choice they make going forward becomes a well-informed one. If you are in Western North Carolina, I would be happy to explain the rules during an initial consultation.