Chapter 13 Bankruptcy,
Chapter 7 Bankruptcy
or Debt Settlement?
So you're having serious trouble keeping up with your bills and you are
at risk of missing a credit card payment or two in the near future. You've
done all you can to increase your income and get access to more cash,
from working more than one job to selling many of your valuable belongings
online to pleading with relatives for help. But it's not enough, and you
realize you need some help.
If you have a lot of equity in your home, or you own your home outright,
then a debt-consolidation
loan, cash-out mortgage refinance, a home equity loan or a home equity
line of credit are probably your best options. However, debtors who
choose to use their property to get cash should be careful not to get
into any kind of debt problems in the future. Here's a simple example:
Jane uses a debt consolidation loan to payoff credit card debt, and she
gets a decent interest rate because the loan is secured by her primary
residence. In this case, Jane has transferred unsecured debt (credit-card
debt) to even riskier secured debt (debt secured by a home.) If Jane gets
into trouble with debt again, she could lose her home, or be forced to
file for chapter 13 bankruptcy to save her home.
Renters Can Qualify for Debt-Consolidation Loans Too
A renter who has a decent credit score can also qualify for a debt-consolidation
loan, but the interest rate associated with the loan won't be as favorable
as a similar consolidation loan for a borrower who owns property that
can be used as collateral (all other things being equal, of course.)
We like debt-managements plans (DMP's) offered by respectable debt relief
companies. However, we recommend debt-consolidation loans first, because
with such loans, the debtor can still have access to credit. DMP are great
for getting payments and interest rates reduced without the trauma of
bankruptcy, but while a consumer is on a DMP, access to credit is extremely
If you rent but have a poor credit score, or you own your home but don't
have enough equity, then you can consider a debt-management
plan (DMP) provided by a reputable, not-for-profit debt counseling
agency. With a DMP, you pay a nominal setup fee, generally between $10
and $75, and you'll pay a monthly maintenance fee, usually in the range
of $25 to $50. On top of the DMP fees, you'll make a monthly payment to
the program which will be used to pay down your debts until your unsecured
debts are paid in full. A representative from a DMP will take the time
to gather all the details related to your outstanding, unsecured debts,
as well as your income and other financial obligations, and will negotiate
with your creditors. The DMP rep' will work to get the interest rates
associated with your unsecured debts reduced, and will also work to get
your monthly payments lowered. For example, a DMP rep' may be able to
get a 12% interest rate associated with one of your credit cards down
to 0%. This may seem fictional but it's true. Click
here to read the real-world experiences of someone who used a DMP
to get her unsecured debts under control.
If you decide to go with a DMP, don't miss any payments! A missed payment
usually results in the program participant being dropped from the DMP,
and that's that last thing you want.
Not All DMP's Are Created Equal
If you've decided to use a DMP to get your finances under control, your
first step should be to find a reputable, not-for-profit debt counseling
company that is going to provide you with courteous and professional service,
and that will do exactly what they promise. Unfortunately, there are many
disreputable DMP's out there, so you have to be careful. If you find a
debt counseling organization that you think is OK, search the company's
website or call and find out if they are accredited with national organizations
like the National Foundation for Credit Counseling (NFCC)
or the Association of Independent Consumer Credit Counseling Agencies
Use your favorite Internet search
engines and see if you can dig up any consumer complaints about the
company you want to use.
Choosing the wrong DMP can be disastrous for you because:
- e.g. your credit card bank may have had dealings with the unprincipled
debt counseling organization in the past, and got burned. Or perhaps
the organization is well known as a low quality debt counseling firm.
In either case, the bank probably won't be open to any negotiation,
instead opting to treat your account like that of someone who's gone
into chapter 13 bankruptcy (which essentially defeats the whole purpose
of using a DMP!)
- A substandard debt counseling company may take your money and make
late payments to your creditors, which would only make your financial
We recommend a DMP before we recommend Chapter 7 or 13 Bankruptcy because
being on a DMP won't ruin your credit profile, and that's a huge plus.
To clarify, a consumer's credit score won't be penalized because the consumer
chose to use a DMP, but it may go down due to other factors related to
being on a DMP, e.g. a dramatic change in the consumer's debt to credit
ratio (also known as credit utilization ratio.) Here's an example:
Jane has two credit cards. One card, issued by Card One Bank, has a
credit limit of $15,000, while the second card, issued by Card Two Bank,
has a limit of $5,000. The balance on the Card One card is $8,000, while
the balance on the Card Two card is $2,000. Jane's available credit
is $20,000, and she has used $10,000 of it, or half of her total available
credit. Her credit utilization ratio is 50%.
Jane has a run of bad luck. She loses her job and gets into a car accident.
She has no income and her medical bills are massive. She manages to
find part-time work, but her income is not what it used to be. She can't
handle the financial strain, so she decides to go onto a DMP from a
reputable, accredited and non-profit debt counseling company. The debt
counseling agency is able to get the interest rates on both her credit
cards reduced, and sets up a monthly payment plan which Jane can afford.
However, since the banks involved don't want Jane to get into any more
trouble with credit card debt, Card One Bank lowers her credit limit
to $8,000, and Card Two Bank lowers her limit to $2,000. These actions
cause Jane's utilization ratio to jump to 100%, and this in turn causes
her FICO® credit score to drop dramatically.
Four years later, Jane has paid off her two credit cards and medical
bills, and she is totally debt free.
In the above example, Jane's credit score wasn't damaged due to the fact
that she went onto a DMP. It was lowered because her credit utilization
ratio rose from 50% to 100%.
If the balance on both of Jane's credit cards was zero when she got
onto the DMP, and she only had to contend with the medical debt, her credit
score probably would have suffered no ill effects at all.
If Jane had decided to file for chapter 13 bankruptcy instead of using
a DMP, her credit score would have dropped dramatically, far lower than
any point reduction caused by a rise in her credit utilization ratio.
If Jane was late on one or more of her credit card payments before signing
up for a DMP, her credit score would have been lowered as a result. There's
nothing a DMP can do to fix this; that's why it's very important to start
on a DMP before you get into trouble with missed payments. Jane would
simply have to wait seven years for the derogatory marks on her credit
reports to expire.
- A debt counseling organization should be willing and able to provide
pamphlets and books related to budgeting, debt management, financial
literacy, etc. at very low or no cost. Representatives should always
be courteous and professional. Before using a debt counseling company,
article, and visit two Federal Trade Commission webpages: this
one and this
- Make sure that you can afford to pay your current bills (utilities,
mortgage, car payment, etc.) as well as the monthly payment that you'll
send to the DMP.
- An honorable debt counseling agency won't let you use any credit card
accounts you have open, and you won't be able to open any new accounts
until you are done with the DMP. The rationale behind these restrictions
is obvious. A consumer who carelessly disregards such rules risks getting
kicked out of their chosen DMP.
- Fair Isaac's FICO® scoring model does not factor credit
counseling into consumers' credit scores.
- In general, about 50% of consumers who signup for a DMP don't complete
the program, according to the NFCC.
Some consumers who drop out end up filing for bankruptcy.
Chapter 7 and Chapter 13 Bankruptcy
We usually don't recommend chapter 7 bankruptcy due to the fact that
it's not suitable for most consumers who are having problems with debt.
Not only will chapter 7 ruin a consumer's credit profile for ten (10)
years, the debtor would also have to give up all their non-exempt assets,
which would be sold by a court-appointed trustee. Chapter 7 is a last
resort option for individuals who earn little or no money, and who have
very few or no assets.
We do recommend chapter 13 reorganization if the debtor in question is
facing foreclosure, as a chapter 13 filing can save a debtor's home. We
like DMP's offered by solid, nonprofit debt-counseling companies, but
these plans can only help with unsecured debts.
Bankruptcy should never be taken lightly. Whether filing for chapter
7 or 13, a consumer's credit rating will be damaged forever. You may have
heard that the maximum amount of time a bankruptcy can stay on your credit
reports is either seven or ten years (ten years for chapter 7; seven years
for chapter 13). While this is true, it doesn't mean that after a bankruptcy
has been expunged from a debtors credit reports, the debtor's credit rating
can eventually return to prime status. It won't. For example, there are
many credit card issuers that only offer the best interest rates and rewards
to consumers who have excellent credit scores and who have never
Be wary about taking bankruptcy advice from a bankruptcy attorney. Most
bankruptcy lawyers will offer first-class advice, but you can never be
sure what a bankruptcy lawyer's primary concern is: collecting fees for
handling your case, or your best interests. It's always best to do your
own research and gather as much knowledge as you can about your options,
so that you can make an informed decision about getting out of debt.
Debt-settlement companies have offered to pay the owners of www.DebtHelp.tv
handsomely for recommending their services. But we don't recommend any
debt settlement firms, for the simple reason that we've done the research
and found too many horror stories. Many consumers who used a debt settlement
firm to settle their unsecured debts later regret doing so, often stating
that they wished they'd filed for chapter 13 bankruptcy instead.
Credit expert John
Ulzheimer lists debt settlement as one of the 7 worst credit mistakes
one can make.
You Can Settle Your Own Debts...
We usually recommend a DMP for consumers who are facing serious debt-related
issues and don't have any home equity to tap into. However, if -- for
whatever reason -- a consumer isn't able to get onto a DMP, there is the
option of settling debts on your own. Always remember that "settling"
a debt means that your creditor is going to lose money, and your creditor
will respond by ruining your credit. The settled debt will be noted
on your report as a negative or derogatory item, and this will lower your
credit score substantially. Negative marks will remain on your credit
reports for seven years.
Also keep in mind that a creditor would rather settle a debt than sell
your debt to a collection agency for pennies on the dollar.
Consumers should begin a debt settlement negotiation by explaining to
the creditor that if a reasonable resolution cannot be worked out, a bankruptcy
filing is right around the corner. This will give the debtor much needed
leverage, and will likely result in the best possible outcome.
Debt Settlement Example
If, for example, you owe a credit card company $6,000 and the account
in is default, you could contact the credit card company in question and
try to negotiate a more manageable monthly payment and a lower interest
rate. Alternatively, you could negotiate a lower, one-time payment to
settle the debt. Some credit card companies have been known to settle
a debt with a one-time payment that is less than 30% of the original debt.
Moreover, credit card debt settlements that amount to 50% of the original
debt are not uncommon.
The Things Debt Collectors Are NOT Allowed To Do
Most debt collectors are honest and honorable, but some break the
rules in order to get what they want. Always remember that even if
you've defaulted on your debt, you have rights, and in a country like
the United States where the people are ruled by laws, you should never
let anyone or any company bully you.
Never let a collection agency harass you. If a collection agencies
is harassing you, let them know that you know your rights, and that
you will report them to your local Better
Business Bureau, your State's Attorney General, your representative
in the United States Congress and your representatives
in the United States Senate. If a collection agency continues to harass
you, or the company plays games like not telling you how much you
owe, then get the full name of the person calling/writing and send
the company a Demand
Collection Agency Cease Contact letter via certified mail, return
receipt. You will need to keep a copy of this signed and dated letter
so that you can show it to a judge if you end up in court.
After you get confirmation that the harassing collection agency has
received your cease contact letter, do NOT answer that collector's
phone calls or letters. If the collection agency in question continues
to pester you, contact an attorney as soon as possible. Don't procrastinate.
Harassment Is Illegal: Debt collection agencies
are not permitted to harass, oppress, or abuse you or any third parties.
Here are some examples of illegal activity:
- Debt collectors are not allowed to call debtors incessantly.
- Collection agencies are not allowed to threaten you with violence.
- Collection agencies are allowed to give your name to credit bureaus,
but they are not permitted to publish the names of debtors anywhere
- Debt collectors are not permitted to use any kind of abusive
language when contacting a debtor. If a collector uses profane language
when contacting a debtor, that agent is breaking the law.
Lies Are Illegal: Debt collectors are not allowed
to lie when engaging in collection activity. Some examples:
- A debt collector is not allowed to mislead you into thinking
that he or she is an attorney, unless, of course, the collector
actually is an attorney. If you want to check if a collector is
an attorney, make a note of his/her name and visit
- A collection agency is permitted say that legal action will be
taken against you only if such action is in fact legal and the agency
intends to take such action.
- A debt collector is not allowed to falsely represent that he or
she is acting on the behalf of a government or credit reporting
- A debt collector is not permitted to falsely claim that you have
committed a crime.
- A debt collector is not allowed to send you forms and claim that
they are legal forms, when in fact they aren't. Furthermore, it
is illegal for a collector to send you legal forms and claim that
they are in fact not legal forms.
- It is illegal for a debt collector to tell you that you will
be arrested if you fail to pay your debt.
- A collection agency can neither garnish your wages nor sell, seize
nor attach your property, unless the law permits such action and
the collector intends to take such action.
- A debt collector is not permitted to misrepresent the amount you
- It is illegal for a collection agency to communicate untrue credit
information about you to anyone, including a credit reporting agency.
- A collection agency is not permitted to send you anything that
resembles an official, court or government document if in fact it
- It is illegal for a debt collection agency to use a false company
Engaging In Unfair Practices Is Illegal: Debt collectors
are not permitted to employ unfair practices when trying to collect
a debt. Some examples:
- Unless the law in your state permits it, a debt collector may
not attempt to assess any type of fee or interest above that which
you owe, unless the contract that brought the debt in question into
existence includes one or more provisions for such a charge.
- Debt collection agencies are not permitted to contact you by
- It is illegal for a collection agency to deposit a post-dated
For more, visit the
Federal Trade Commission Website
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Debt and Personal Finance Facts and Stats
- Doing a short
sale will knock at least 100 points of your FICO® credit score.
- It's literally impossible to get a perfect FICO® score (850)
until you are at least forty years old. Any FICO credit score above
800 is top-tier. For some perspective: even Dr. Mark N. Greene, the
CEO of Fair Issac corporation, has a FICO credit score or 795 (as
of March 2009.)
- A consumer with a FICO® score of 780 can expect their score
to drop to around 580 as a result of a foreclosure.
- In most cases, once a homeowner has 20% equity in their home, the
homeowner can call the mortgagee and have the mortgage insurance (PMI)
- The total outstanding student debt in the United Kingdom now stands
at £26 billion, which has doubled in just 5 years (source.)
- In 2006, The credit card unit of JP Morgan Chase earned $3.2 billion
in profit, accounting for twenty-two percent of the company's earnings.
Between 2003 and 2005 profitability for large, American credit card
banks was between 3.6% and 4.1%.
- The average amount of debt carried by a household in the U.S. is
$30,000. With 6 out of 10 households not paying off their credit card
balance each month, it takes almost 43 months for the average American
family to pay off their credit card bills.
- On the average credit card, a $1000 charge will take almost 22 years
to pay off, and if only a 2% minimum payment is made each month, that
$1000 charge will accrue more than $2,300 in interest.
- In a survey conducted in the United States, the top three things
respondents were willing to take on debt to purchase:
- Holiday gifts for family
- Internet access at home
- Home computers
- Almost seventy-five percent of those asked said that they don't
read the terms and conditions associated with the credit cards they
- The US Department of Agriculture says that having a child under
age 2 today costs the average family $800 a month, which is almost
18% of their income before taxes.
- During the 1990s, credit card debt among those under 34 grew by
- In 2002, the average college senior had six credit cards and an
average balance of just over $3,200.
- The United States is the only industrialized nation that does not
provide paid family leave to new parents.
- Over 25 percent of college graduates in 2003 had student loan debt
higher than $25,000, up from 7 percent in 1992-93.
- In the third quarter of the year 2008, debt payments took up 14%
of all of America's disposable income.
- Out of the average minimum monthly credit card payment made, 90%
is interest and only 10% goes toward the principal.
- Over three billion of the world's population live on less than two
dollars a day. A little over a billion more people live on less than
a dollar a day.
- As of October 31, 2008 the national debt was a little over $10.5
trillion, which is almost three quarters of the GDP (gross domestic
product). This averages out to about $35,000 per person.
- Almost 50% of American households say that they have trouble paying
just the minimum monthly payment on their credit card debt.
- During the 1990's, non-mortgage consumer debt rose from close to
$1,000,000,000,000 to $1.27 trillion.
- By the end of 2000, Americans were accruing interest on $574 billion
of revolving credit card debt, with the average American household
carrying almost $10,000 in revolving credit card debt.
- The United States Federal Reserve estimates that 40% of American
households live beyond their means, spending more than they actually
earn. The typical household in the US spends $1.22 for every dollar
- In the United States, the average credit card annual percentage
rate (APR) is just under 18 percent.
- Survival Debt: In 2003, American consumers charged over $50,000,000,000
(fifty billion dollars) to their Visa credit cards for household expenses
like rent and mortgage payments, home and auto insurance, home and
mobile phone bills and cable TV. That's just Visa.
- In 1999, The IRS started letting American taxpayers pay whatever
taxes they owed to Uncle Sam using credit cards. In 2003, $900,000,000
(nine hundred million dollars) in tax payments was charged to credit
- In the first quarter of 2005, Americans charged over $6,000,000,000
(six billion dollars) on their credit cards to pay for fast food.
- Fair Debt Collection Act: The federal Fair Debt Collection Practices
Act prohibits debt collectors from harassing you, making false statements,
and engaging in unfair practices. Your state may have additional laws
that set rules and regulations for debt collectors.