Bankruptcy or Debt Negotiation: Which is Best?

The answer to this question, and most others like it, is “it depends.” Most financial planners believe a family’s debt-to-income ratio (DTI) should not exceed 15 percent of net income. That’s unrealistic for most people. If a family earns $6,000 a month and pays $1,500 rent, that’s already 15 percent, before they make their car payments and pay other monthly bills. 20 percent is in the danger zone, and 25 percent is usually untenable.

If your DTI is over 20 percent, debt reduction is imperative. Whether bankruptcy or debt negotiation is best, a Chicago bankruptcy lawyer is an important partner in this process. A lawyer evaluates your situation and offers tailored advice about which approach is better. A non-lawyer bankruptcy petition preparer can only fill out forms, and a debt reduction company associate is little more than a salesperson. You need more information than that before making critical decisions.

Bankruptcy Pros and Cons

The Automatic Stay, asset protection, and debt discharge, especially in a Chapter 7, are the three biggest benefits of bankruptcy.

Creditors are very aggressive debt collectors, partially because the Supreme Court has watered down some key consumer protections in recent years. They quickly take adverse action against debtors who fall behind on payments. These adverse actions induce:

• Repossession,
• Wage garnishment,
• Foreclosure,
• Lawsuits, and
• General harassment.

Bankruptcy’s Automatic Stay immediately stops these proceedings. In most cases, Section 362’s protection extends until the judge closes the case.

Furthermore, bankruptcy protects core assets from creditor seizure. Creditors cannot take houses, motor vehicles, personal property, or other assets to pay debts. Furthermore, when the judge closes the bankruptcy, the judge discharges (forgives) most credit cards, medical bills, and other unsecured debts.

Chapter 13 is a little different. The same protections apply. Chapter 13 also gives debtors up to five years to catch up on past-due home mortgage and other secured debt payments. A Chicago bankruptcy lawyer uses legal loopholes to extend these protections even further.

The one major downside to bankruptcy, the credit score hit, isn’t as severe as banks would have people believe. Most people already have bad credit when they file. The filing simply makes a bad score worse.

Debt Negotiation Pros and Cons

Bankruptcy’s one major disadvantage is debt negotiation’s one big advantage. The credit score hit isn’t as severe. However, once again, the effect is overstated. To many lenders, an account note like “settled” is almost as bad as a note like “charged off” or “referred to collections.”

Two overarching principles guide non-bankruptcy debt reduction. Almost everything is negotiable, and something is usually better than nothing.

A reduced interest rate is usually in the cards. Even a quarter-point reduction on a home loan could save a family thousands of dollars a year. If there’s any evidence of fraud or other shenanigans, like robo signing, additional relief, like UPB (unpaid principal balance) reduction, might be available.

Additionally, creditors don’t want a used house or car. They want money. As long as the offered amount exceeds the money a creditor would make on a liquidation sale, most creditors will sign off on the agreement.

The bankruptcy bluff is an important negotiating chip. The debtor may have no intention of filing bankruptcy or not be eligible for some reason. But the bank doesn’t know that.

 Work With a Savvy Cook County Lawyer

No matter what kind of financial problem you are having, bankruptcy could be a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We routinely handle matters throughout the Prairie State.

Source:

extension.umn.edu/credit-and-debt/how-much-debt-too-much-debt