Debt is a significant problem in our society, affecting millions of people who have credit card debt, mortgages, bank loans, and such. Consumer debt is so high that by quarter three of 2018, this figure was nearly $14 trillion, an increase of $219 billion from quarter two of the same year. The New York Federal Reserve noted that consumer debt mainly comes from four areas: mortgages, auto loans, credit cards, and student loans.
Bankruptcy and debt settlement are two methods of dealing with debt. The former wipes out debt while the latter allows you to pay creditors a portion of the loan debt. When you are faced with financial difficulties, and the bills keep piling up, you need to know which approach of debt resolution is best. The Los Angeles Bankruptcy Attorney have helped many clients in this situation, and we help them determine the most applicable solution to satisfy creditors in Los Angeles.
Is Debt a Bad Thing?
Debt is not mainly a negative thing as it allows people to afford things now and pay for them in due course. The borrowing culture is so pervasive that the average debt per household is $135,768. Financial experts say determining whether the debt is good or bad is based on whether the said debt creates a future opportunity or problem. For example, taking out student loans to earn a college degree opens the way for a career that will improve your life, and you can pay off debt.
When taking out student loans, you must consider the correlation between education and earnings. If the degree you are pursuing cannot lead you to a high-income, then you are accumulating bad debt. Borrowing money to invest in an appreciating asset is considered as good debt, and so is a mortgage. However, overextending yourself by acquiring a home that is well above your income paves the way for bad debt as you are unlikely to sustain the payments.
Owning and using a credit card is essential to build up your credit score so you can borrow money at affordable rates. The smart way of using credit cards is charging amounts that you can relatively afford in cash and paying off these debts every month. Knowing how much mortgage you can afford is vital, so you don't rack up too much debt than you can afford. Consider the rate of repaying debt versus how much your income grows per annum.
Average Debts in California
California leads the nation in mortgage debt with the average resident owing $334,925 in home loans, while the national average for mortgages is $192,749. Student loans are lesser than other parts of the country, standing at $28,950, while the national average is $37,173. California residents have an average of $5,000 in credit card balances, and the average credit score stands at 661.
This high credit rating means Californian's can borrow more money than most people at a better interest rate. Los Angeles Bankruptcy Attorney has encountered many clients who were trapped in the vicious cycle of debt so much that paying creditors is impossible. We have financial experts who can help you determine the best way of dealing with your liabilities.
What is Debt Settlement?
Debt resettlement entails hiring a company to negotiate your outstanding debt with your creditors. This exercise lowers the total debt owed to a manageable figure through the settlement agency. You can only pursue this option if you have unsecured debt i.e., there is no collateral involved.
Once you enroll in a debt settlement plan, you will start paying monthly installments, which will pay back the cost of the settlement plus the value of these services. While this option seems attractive to many, some creditors are adamant and will not discount liabilities, and the interest keeps growing. If you have been paying off debt then put things on hold in the hopes of applying for debt settlement, you may end up with more debt.
Debt settlement doesn't require financial counseling or hiring a lawyer, but convincing creditors to discount balances is best done by experienced professionals. The Los Angeles Bankruptcy Attorney advises clients with debt below $5,000 to use debt settlement as it is cheaper. It spares you from a bankruptcy charge on your credit history.
This method is also ideal for people who don't qualify for liquidation bankruptcy or Chapter 7. If you go for debt settlement, you will pay taxes, fees, and interest that equates to 65% to 90% of the total debt.
Advantages of Debt Settlement
The foremost benefit of debt settlement is you pay a fraction of total liabilities. You save the time and costs that come with bankruptcy, not to mention retaining your ability to borrow money.
Creditors are fully aware that you could file for bankruptcy and leave them empty-handed. Negotiating a discount is a show of good faith, and they can agree not to report this arrangement to the leading credit-rating bureaus. This waiver means you can rehabilitate your credit rating in lesser time.
If you can pay off the negotiated debt at once, collection agencies will accept a lesser payment made at once, so they close your account. Alternatively, you can arrange an extended payment plan to suit your income. You can get free counseling for managing debt from the National Foundation for Credit Counseling.
Disadvantages of Debt Settlement
Devising a plan to pay off less money than you owe may sound noble, but there are negative impacts attached. Your creditworthiness will drop, and your FICO score will take a hit over the next few years. The government considers the forgiven debt as income for which you must pay taxes.
Making lump-sum payments is not feasible for someone who already defaulted on one or more debts. What's more, struggling with debt settlement means you suspend paying your credit card bills, and this exposes you to interests, late fees, and collection action.
Apart from declining requests to negotiate debt, creditors can use legal action to garnish your income if they suspect you cannot pay them. Tensions run high, and you may retaliate by refusing to make more payments. Your accounts could go into collection, thus hurting your credit further.
What is Bankruptcy?
Bankruptcy is a legal process of handling debt where attorneys work to safeguard your interests and shield you from harsh penalties by creditors. This process is ideal for people who cannot afford debt settlement due to the ratio of liabilities to income.
Bankruptcy starts by filing a petition at a Los Angeles court stating that you are unable to reimburse all or some of your creditors. There are two common types of bankruptcies; Chapter 7 and Chapter 13, and each has different requirements.
Chapter 7 Bankruptcy
Filing under Chapter 7 of the bankruptcy code is ideal for people with income levels below the state's median. This code, also known as liquidation bankruptcy, is favored as it takes roughly four to six months to finalize. These usually are "no asset cases," which means applicants don't have to give up essential assets like their primary residence, family car, or tools of their trade, etc.
Creditors can only repossess nonexempt assets like a secondary residence, luxury vehicles, pricey art, and such. If there are valuable assets at stake, reaffirming the debt confirms to the lender that you are still going to pay the balance even as you proceed with liquidation. This code has a provision to buy back nonexempt assets at the price your creditors would have gained if there was an auction.
Please note, this code does not absolve child support and alimony balances. If you qualify for Chapter 7, your legal expenses will range between $500 to $3,500 and $335 in filing charges. The bankruptcy court may waive these fees if your income is below the poverty line by 150%. While Chapter 7 is favored by many, you can only legally use this channel once every six years.
Chapter 13 Bankruptcy
Filing under Chapter 13 is essentially a plan to repay some or all liabilities within three to five years. This code allows you to keep the primary residence provided you make mortgage installments. If you recently lost your job, Chapter 13 permits the court to delay auctioning off assets, and this gives you some time to find employment.
Sometimes the bills can increase significantly, or your income can decrease due to a lousy economy or both. Filing under this code prevents debt collection and foreclosures, albeit momentarily. This process usually takes three to five years, and you can utilize this method as many times as you wish.
Please note, you will have child support and alimony checks within three to five years, or your separated spouse will take legal action. Property settlement contracts will also survive Chapter 13 bankruptcy. If you are approved for Chapter 13 bankruptcy, your legal expenses will range between $1,500 to $6,000 and $310 in filing charges.
The Bankruptcy Protection Act of 2005
Indiscriminate spending coupled with economic downturns, loss of employment, etc. has made accumulating debt more complex than ever before. Previously, some people would turn to reckless spending, knowing they could file for bankruptcy and cheat creditors of their dues. The Bankruptcy Protection Act of 2005 makes it harder to use this debt resolution process unless one fulfills the legal requirements.
What is the Means Test?
California law has provisions to help you deal with debt, so you are not constantly hounded by creditors. Choosing the right bankruptcy option is not easy, so you need a bankruptcy attorney who is adept at helping clients in unique situations.
Nevertheless, the law has put measures in place to prevent abuse of bankruptcy codes, starting with the means test. The Federal Bankruptcy Code stipulates that people filing under Chapter 7 must prove diminished capacity to pay back liabilities. The test factors in your income, expenses, assets, and unsecured debts to determine if you can repay some outstanding balances. If you fail the means test, the court may dismiss your petition to go solvent, or it can force you to file under Chapter 13.
Once you are approved to file under Chapter 7 or 13, the court appoints a bankruptcy trustee to represent the interests of creditors during court proceedings. This person or corporation examines your financial petition, overseas liquidation of assets under Chapter 7 then pays off creditors with these proceeds. Under Chapter 13 petition, the trustee is responsible for managing the repayment plan and recompense monthly payments to creditors until the bankruptcy is discharged.
What Does Bankruptcy Litigation Entail?
Going through bankruptcy is not easy, and that is why petitioners must acquaint themselves with court procedures and be prepared to pay legal bills and other charges. Compromises must be made to keep creditors happy, while not leaving you in financial ruin in a volatile economy. There are important things to note about credit management tool:
- Automatic Collector Stay
An automatic collector stay is triggered soon after filing to protect you from extreme actions by creditors like harassing you via telephone or sending demand letters. If your creditor wishes to continue debt collection, they must request the bankruptcy court to lift this injunction. The judge will examine your case to see who would gain from debt collection then vacate the stay or not.
Even if the judge doesn't lift the automatic collector stay, creditors can still pursue a lawsuit independently from the bankruptcy court. In doing so, they hope to sway the judge's ruling, so they get the power to collect their money through any lawful means. Freezing bank accounts or getting liens over your real estate assets are popular ways creditors recoup their money.
- Writ of Possession
Landlords seeking back rent can obtain a writ of possession from eviction court. This order permits them to clear your belongings from the apartment or home so another tenant can rent the unit. If they don't have this judgment, the automatic stay prevents eviction and changing the locks. Nevertheless, if the landlord has proof of drug use or damage to the property, they can legally evict you.
- Debtor's Court Cases
Proceedings at bankruptcy court don't bar you from filing lawsuits against someone or corporation that owes you money. You can demand these balances without asking the court to lift the automatic stay, provided you use the money to settle liabilities on your end.
- Stop Judicial Foreclosures
Foreclosures on properties can either be judicial (self-help) and non-judicial. The former helps the lender to obtain a deficiency judgment against you, but they are not prevalent in this state. Creditors typically favor non-judicial foreclosures as they are quick and less expensive.
This approach applies when there is a power-of-sale clause in the title such that if you default, trustees can offload the property to pay off balances. Filing for bankruptcy stops judicial and non-judicial foreclosures so you can save your home from an auction.
- Incomplete Construction Projects
Construction companies filing for bankruptcy may get some reprieve from the government to stop the scourge of abandoned buildings. These construction sites are an eyesore, and they can lower the market value of adjacent properties or homes. In the end, the bankruptcy court protects the welfare of other homeowners, so they don't take a financial hit because of your bankruptcy.
- Active Criminal Cases
Bankruptcy proceedings do not interfere with legal troubles for active criminal cases. The automatic stay only comes into effect if the other case requires paying the government money. However, criminal cases involving bad checks will carry on without intervention from a bankruptcy court.
Disadvantages of Bankruptcy
This bankruptcy will stay on your credit history for a decade, and this will hurt your credit score to some extent. However, if you have struggled with mounting debts for many years, bankruptcy is likely to improve the score, so money lenders will find you worthy of a loan.
In marriage situations, one spouse filing for bankruptcy does not automatically absolve the other partner from joint liability. The remaining spouse will still need to pay off their obligation, and if you are filing under Chapter 7, you must wait eight years before submitting it again. The waiting period for Chapter 13 is two years.
Bankruptcy is noted on public records, and so everyone can have access to this financial information. Employers may deny you work if the position entails handling money or specific jobs like running a nonprofit or school administrator. As well, professional associations may revoke your membership until this process finishes.
You must complete a credit counseling program of ninety minutes and attend another two-hour session after the bankruptcy is finished. These classes cost around $50 per session, which is an extra expense, not to mention time-consuming.
Finding a Los Angeles Bankruptcy Attorney Near Me
In an ideal world, a debt settlement would be the best option, so you save your credit score and keep your borrowing options open. However, as we discussed previously, many people in Los Angeles have liabilities in tens of thousands, and repaying this debt would take years or never.
The fundamental reason for bankruptcy is providing debt relief from liabilities that are outside your capability or to allow extra time to repay debt. If you have accumulated too much debt than 50% of your income, bankruptcy is a recourse that accords you a fresh start. Our attorneys will examine your case to see which option is ideal, so you are assured of making an informed decision. Contact the Los Angeles Bankruptcy Attorney on 424-285-5525 for a free consultation with our legal and financial experts.