After I got off the phone with a prospective client recently, my law partner questioned me about something he had overheard me say to the prospect. Really he criticized me for telling the prospect that bankruptcy should be used as a last resort. After we talked a little bit about the notion, I have to say I agree that in most cases filing a Chapter 7 or Chapter 13 bankruptcy should not be used as the last resort.
In fact, I cannot tell you how many times clients have come to me after they tried everything to pay their debt, and they have not only put themselves in a much worse position financially and damaged their credit further, but the emotional strain has caused numerous other problems in their lives, things like health issues, divorce, depression, etc. Perhaps one or two of their creditors, usually the most annoying and harassing ones, got paid to some extent, but most people have more than one or two creditors and the remaining creditors are still out there and may be poised to begin exercising their rights and remedies next.
Some of the things individuals do before they consider bankruptcy include:
• Deplete their savings to pay debt
• Cash out their retirement funds to pay debt
• Take out a second mortgage (usually at an undesirable interest rate) and use proceeds to pay debt
• Pay a debt settlement company to settle their debts
• Settle their debt by dealing directly with the creditor or its attorney
Perhaps some individuals believe they are being “noble” or “responsible” by doing these things not realizing the negative impact they may have.
Depleting Your Savings Or Retirement To Pay Debt
First of all, no one should deplete their savings to pay off debt because it is more noble and responsible to have savings to protect you and your family through difficult financial times in order to pay for the necessaries. It is also responsible to have retirement savings because, frankly, social security income just cannot support most people. 100% of your retirement funds are protected if you file bankruptcy in most jurisdictions (definitely if you file in Pennsylvania), and most individuals are able to protect a portion or all of their savings if they file bankruptcy.
Debt Settlement
Unfortunately debt settlement also can have many negative implications. If you settle a debt by paying less than what is owed, you likely will have tax consequences. Specifically, the amount of the debt that you do not pay will become income to you on your income tax return, and suddenly you may owe Uncle Sam instead the creditor you just paid. Additionally, most people are not aware that settling debt damages your credit score – this comes as quite a surprise to most. It may not damage your credit score to the extent that filing a bankruptcy may, but you have to consider both the hit to your credit as well as the tax consequences and decide whether it is worth settling with one or a few of your creditors – especially if you have other creditors that may be banging on your door soon after you clear up the one or two.
If you choose to use a debt settlement company to assist you, many of them charge unreasonable fees and other charges so you end up paying much more back than you would have otherwise with little or no result. There are numerous debt settlement companies being investigated and prosecuted for unscrupulous practices – just google “debt settlement companies investigations” and see what I mean. We have had clients who tell us that they paid more than $2,000 – $3,000 to companies that promised to get them relief and did not do anything for them. We have filed bankruptcy cases for many people who tried debt consolidation or debt settlement first and they invariably share that they wished they had filed bankruptcy instead.
Fresh Start
Bankruptcy was intended by the U.S. Congress to give debtors a fresh start as well as a way to treat creditors fairly and equally. By paying the one or two creditors currently harassing you to the detriment of supporting yourself and your family is not responsible or noble. Bankruptcy may be the best option for you before you put yourself in a deeper financial quagmire, and it will allow you to begin rebuilding and repairing your credit much faster than most of the other options out there.
If you are in the Philadelphia metro area, including the counties of Bucks, Montgomery, Delaware and Chester, do not hesitate to contact Kimberly Coleman, or my partner, Ray Kempinski, your “no pressure” Philadelphia Bankruptcy Lawyers, for a FREE CONSULTATION.