Those who are in serious debt and are not bringing in the money necessary to pay off that debt do have several alternatives to bankruptcy, but many of the services offered by companies are predatory. Driving you further into debt is a big business and there is a lot of money to be made regardless of whether or not you pay your debts back. In this article, we’ll discuss some of the alternatives to bankruptcy and whether or not they offer the benefits they claim to offer.
Actually, debt consolidation is a great way to manage your debts, but your chances of being offered a plan by a debt consolidator depends entirely on your credit rating. Debt consolidators are not in the business of lending people helping hands out of their current situation. What they do is purchase all of your debt and charge you a lower interest rate. On a razor-thin profit margin, they can’t afford to take risks. So most of the folks who need a debt consolidator aren’t going to find one willing to work with them.
HELOC or Home Equity Loans
Home equity lines of credit are a popular way for Americans to shift their debt from one place to another. Here, it behooves us all to understand the difference between secured and unsecured debt.
Unsecured debt is credit card or medical debt that is not secured against a property. Secured debt, like your mortgage or your car, is secured against the property. When people take out HELOC loans to pay for debt, they are turning their unsecured debt into debt secured against their home.
This is a terrible move to make, frankly. You are wagering your home against your ability to pay off certain debts in time. If your HELOC payments go into default, then the lender has every right to foreclose on your home, even if you’ve already paid it off in full.
Unless your credit is sterling and you’re certain you will be able to make payments on time, HELOC loans are very risky and often result in debtors losing their home. Before taking out a HELOC loan to manage your debt, consider speaking to a bankruptcy attorney first.
Debt Settlement Companies
Debt settlement companies offer debtors an opportunity to repay a portion of their debts. However, there is no guarantee that a creditor will be willing to negotiate the price down or even listen to the offer being made.
In a best-case scenario, the company will negotiate an offer to settle the debt in a lump-sum payment that you can easily afford. However, this doesn’t always happen. In some cases, all the debt settlement agency does is reduce your payments while extending the term of the loan, which ultimately costs you money in the long run. More importantly, you don’t need to pay anyone to increase the term of your loan to lower your payments.
Bad Debt Practices
If you have a credit or debt counseling that you’re working with, you want to be sure that they aren’t only managing your unsecured debt. Under Oregon’s law, certain types of debt take precedence over others. Child and spousal support payments are at the top of the list with certain unpaid taxes. Next come secured debts such as your mortgage or car payments. After that, comes unsecured debt.
If you’re working with a debt counselor who is only tackling your unsecured debt (which can easily be discharged in bankruptcy) while ignoring priority debts like child support or mortgage payments, they’re doing it backward.
There are also several debt management programs out there that operate for a fee. Some of these will advertise themselves as non-profits but they will actually be fronts for for-profit businesses. It’s a loophole that they can exploit because people erroneously believe that they can’t be exploited by non-profits.
Tax Consequences of Forgiven Debt
The IRS considers debts that were forgiven or reduced as taxable income unless that debt has been discharged in bankruptcy. You don’t want any surprise letters from the IRS, and the debt forgiveness will be a matter of public record, so be careful after negotiating settlements. You’re going to owe some of the money you saved to Uncle Sam.
Talk to a Eugene, OR Bankruptcy Attorney Today
The best part of dealing with your debts is being in a better place than you were left beforehand. However, several popular approaches that avoid bankruptcy accomplish the exact opposite. If you’re struggling with debt, you should contact a bankruptcy attorney before making any move with a debt settlement or credit counseling agency. Butcher Law Office, LLC offers a free one-hour consultation with no obligation to sign as a client. Call us today for more information.