Should I File For Bankruptcy? | Law Office of Jonathan M. Peake, LLC

SHOULD I FILE A BANKRUPTCY IN NEW MEXICO?

When an individual is facing financial problems, there is usually a number of alternatives. Which alternative to choose is highly fact sensitive. Things to consider are 1) the number of creditors, 2) the size of the debts, 3) how long it would take to pay off or manage. The main financial alternative to bankruptcy is credit counseling.

Credit Counseling - An Overview

Credit counseling agencies have become very prevalent in the recent years, but do they really work? A credit counseling agency usually makes claims that are completely untruthful, including the claim that credit counseling will not affect your credit.

A credit counseling agencies works in the following way. The agency asks you to pay them what would have been paid to your creditors. They will ask that you do not pay those creditors. During that time you will start to notice that your calls from your creditors are increasing. This is because the agency is not distributing the money you paid them, but instead saving it up until a later time. When your debts are not being paid, not only will calls from your creditors increase, but your credit score will also be affected.

The effects of non-payment can be found at FICO’s website, when they released information in 2012 regarding different negative credit actions. They stated that an individual with a score of 780 can expect to drop to between 670 and 690 from a 30 day default on a single account! Over a larger period of time, this effect will grow and a drastic score decrease will be noticed.

Eventually, the agency will negotiate with your creditors, betting on the fact that they will be more desperate at that time. The money that had been paid to the credit agency will be pooled together and used to pay off your debts in lump sum - but not after the agency has taken an extremely healthy cut off the top, leaving the consumer with a lower amount going to their debt than if they would have been paying the creditor directly. Additionally, there is no guarantees that these companies have to negotiate a lump-sum amount, leaving the creditor in a much worst position than before.

In the even that the agency can negotiate some of the debts down, any portion of the debt that is “forgiven” will be counted as taxable income for tax purposes, meaning that the consumer will have to pay taxes at the end of the year that they may not have expected.

How Bankruptcy differs from Credit Counseling

Despite the reputation that bankruptcy often receives, it is frequently the best option for consumers. Bankruptcy can cover many areas that credit counseling, or other alternatives cannot, such as stopping foreclosure, repossessions, and wage garnishments.

A bankruptcy is different in that upon filing, it immediately freezes your debt problems - creditors are not allowed to call any longer, wages cannot be garnished, foreclosure and repossession actions are put on hold. Many debts will be completely discharged - not reduced, but completely barred from recovery. Additionally, the amount discharged will not be counted as income for tax purposes. In some Chapter 13 circumstances, a small balance may be required to be paid on certain debts due to a debtor’s high level of income.

The effect on credit is a one time transaction, that will prevent other negative score affection actions, such as default, foreclosure, and repossession. As soon as the bankruptcy is completed, the consumer can instantly start building back up their credit. In many circumstances, a bankruptcy will actually boost a credit score due to the elimination of debt, thereby putting the consumer’s debt-to-income ration in healthy ranges.

Bankruptcy allows the consumer to take control over their finances once again, in a way that credit counseling does not. Instead of relying on creditors to negotiate with the consumer, bankruptcy prevents any collections lawsuits, judgments, phone calls, and garnishments. The consumer is able to stop these actions with the force of the US federal bankruptcy court behind them. A failure of a creditor to comply may result in action being taken against them including sanctions or forcing them to come to court to explain themselves.

Upon the conclusion of a bankruptcy case, the Debtor is able to have a fresh start. Most people don’t surrender their personal belongings and property and are able to reestablish themselves immediately following the discharge. Where a lot of negative items can hit a credit report by credit agencies, defaults, and settlements - the healing process cannot begin until all outstanding debts and obligations are handled. Although a bankruptcy will be listed on a credit report for 7 to 10 years, the consumer can start rebuilding their credit as soon as their case is filed - even while they are in the bankruptcy process, by making on time payments to any secured debts, such as homes and vehicles.

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