Filing for bankruptcy protection can be a difficult decision. Many clients I’ve spoken with as an Asheville bankruptcy lawyer tell me that they have tried everything to avoid filing. Though well-intentioned, many consumers who file bankruptcy after struggling for a long time would have gotten a better result had they reached out for professional help earlier. The first step when financial trouble hits is to pause to consider all the options available.
What are the alternatives to bankruptcy?
The first step to determining what kind of options your family has is to create a budget. Write down all the monthly household income on one page and then all the monthly expenses on another page. However, imagine that all of your unsecured debts (credit cards, personal loans, medical bills, etc.) have disappeared and no longer exist. If that happened, would your budget work moving forward?
If the answer to that question is “Yes,” determine whether your budget would still work while paying off those debts in less than 4 years by using this online calculator.
Perhaps you can sell an asset which would generate the money needed to pay off the debt? Is there a way you can reduce expenses enough to make your current budget work while paying off the unsecured debts in less than 4 years? Good possibility of increased income in the foreseeable future? If yes, there may be non-bankruptcy alternatives which would work well for your family.
Do not sell or mortgage exempt assets
In North Carolina, retirement accounts are exempt meaning that an unsecured creditor cannot seize those funds in order to satisfy a debt even if they have a judgment against a consumer. However, once retirement funds are cashed out, they become fair game to those same creditors. Likewise, home equity is exempt up to $70,000 per married couple in North Carolina. Before taking out a mortgage or cashing out retirement accounts, consumers should seek professional advice first.
If your budget doesn’t work, and you don’t like the idea of speaking with a lawyer about it, OnTrack Financial is a wonderful community resource here in Western North Carolina. They can help you make a budget and negotiate a repayment plan that may include a reduced interest rate on your existing debt. Creditors generally cease collection actions against those participating in OnTrack. Do not send your money to for-profit debt relief companies who advertise online or on television. These companies spend large amounts of their budgets on advertising, and their plans seldom work well for consumers. Generally, their plans cost more than a bankruptcy case would anyway without the benefit of a court ordered discharge.
Negotiate a settlement with a creditor
In my experience, after several months have passed without payment from a consumer, many credit card companies or debt collectors will accept a lump sum payment of 30%-50% of the principal balance to satisfy a debt when that creditor believes that debt cannot be collected under state law. There are three major disadvantages with this debt relief strategy: (1) a consumer’s credit score is still damaged when this type of “short-pay” agreement is reached, (2) a consumer may incur 1099 liability from the IRS for the amount of debt which is forgiven, and (3) this approach is generally more expensive and time consuming than a bankruptcy case.
If OnTrack Financial can’t help, consider bankruptcy. Many attorneys in Western North Carolina offer free, initial consultations. Sign up for one with me here. Bankruptcy, many times, offers the fresh start consumers need in the least expensive and most efficient way available. Further, when consumers reluctantly seek to eliminate debt through a bankruptcy discharge, their families frequently reap the benefits: better housing, better food, and better medical care.
For this reason, I believe consumers who make the difficult decision to file for bankruptcy relief often do so because they are choosing to protect and support their family rather than continuing to send money to old creditors month after month.
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