Comparing Debt Relief to Bankruptcy
How does debt relief work?
According to a Debt Relief Program Group, whose name shall remain nameless in this article, a debt relief program reduces the outstanding principal amount you owe to your creditors. Most can not decrease interest rates or change the length of a loan term, but some may. During debt relief, the company negotiates directly with creditors on behalf of their clients in an attempt to have the Creditor accept less than the full amount owed. This, in theory, enables the creditor to get paid sooner and the client to resolve the debt in two to five years, which is much faster than by making minimum payments. In addition, they are usually able to waive interest, while in the program.
Compare this to the relief under title 11 of the United States Code (the Bankruptcy Code). In a Chapter 7, all debt (excluding Tax and Domestic Support Obligations) are subject to discharge. In a Chapter 13, even some tax debt is able to be discharged. Any debt not paid in full in your Chapter 13 Plan is discharged in full. Timing is also very crucial. A Chapter 7 (if you qualify) is usually completed 6-7 months from the date you file. A Chapter 13 is usually 36 - 60 months. Interest on your unsecured debt (your credit cards) is frozen as of the date of the filing, whether in Chapter 7 or Chapter 13.
According to the Debt Relief Program, these are the upsides and downside of Debt Relief:
| Pros of Debt Relief | Cons of Debt Relief |
|---|---|
| Significant savings over making minimum payments | Debt collection calls |
| One low monthly program deposit | Legal risk |
| Much faster than making minimum payments | Impact to credit |
As was stated before, Bankruptcy is different, and in this author's opinion, more powerful. While you get the benefits of debt relief, listed above, you do not have all of the negatives. Once you file for bankruptcy, the provisions of 11 U.S.C. 362 (also known as the Automatic Stay) go into effect. Creditors are required to cease and desist from ANY and all collection attempts or practices. This means no more harassing calls, no more threatening letters, AND the Creditors are forbidden from instituting or continuing any and all legal proceedings to collect the debt WITHOUT permission from the Bankruptcy Court, and same is sparingly given, and your bankruptcy counsel must be given notice of the request and can oppose such a request. Unfortunately, it does go on your credit report, and remains there for 7 - 10 years. This is not as big an impact as many people believe, and below is a video about how long bankruptcy remains on your credit report. Or click here to watch it.
How long does debt relief take?
According to a Debt Relief Program Group, you can complete a debt relief program in 24 to 48 months, though the length of time it takes to complete a debt relief program can vary by debt relief company.
A Chapter 7 bankruptcy is 6-7 months and a Chapter 13 Bankruptcy Plan is usually no shorter than 36 months, and can be no longer than 60 months.
Types of debt that qualify for debt relief
Debt relief typically works with unsecured debt. "Unsecured" means the debt isn't tied to an asset, like a car or house. Most debt relief groups do not work with secured debt, which is a loan that is secured by a tangible asset.
| Unsecured Debt | Secured Debt |
|---|---|
| Credit card debt, Personal loan debt, Medical debt | Vehicle loan debt |
| Some private student loan debt | Mortgage debt |
| Some types of business debt | Federal student loan debt(not secured but not dischargeable) |
This is very different from Chapter 7 or Chapter 13. In Chapter 7, as was previously discussed, all debt except for Tax Debt, Secured Debt and Domestic Support Obligation is forgiven. In terms of secured debt, chances are you will want to keep the Secured Debt items (your house or your car). In Chapter 7 Bankruptcy, you are able to Reaffirm the Debt, meaning you enter into an Agreement (filed with the Court) showing if you were relieved of the other debt, that you could continue to make your monthly payments. In a Chapter 13, you can actually "cure" any delinquent amounts on a secured debt, through your Chapter 13 Plan.
Take this simple hypothetical as an example...Jane Doe is a single mother and earns approximately $100,000 Gross. She is two (2) months behind on her Mortgage (total $4,000) and one (1) month behind on her financed vehicle ($350.00), and has $40,000 in credit card debt (four cards, each at $10,000). Her hypothetical Chapter 13 Payment to the Trustee is $400.00 per month for 60 months. That translates to a $24,000 plan. After paying the Chapter 13 Trustee her 10% (Standard Commission Rate), there would be $21,600 to pay her creditors. Secured Creditors get paid first pursuant to the Bankruptcy Code, so the Mortgage payments get caught up first, then her car bill, and then whatever is left, is paid to the general unsecured creditors (the credit cards) on a pro-rata basis. So again, hypothetically, after the car and the mortgage are caught up, the Trustee would disburse the balance of whatever is left. In this example, we have a $24,000 plan, less the Trustee's Commission ($2,400), less the Mortgage payment ($4,000) less the Car Payment ($350) leaves $17,250 for the general unsecured debt. So the Trustee would disburse the remaining funds ($17,250) to the different credit cards equally (about $4,312.50) to each card.) IF Jane successfully completes her Chapter 13 Plan, and is granted her discharge, the balance on each card that was not paid ($5,687.50) is discharged forever and the creditor can not seek to recoup those funds.
Debt relief fees
According to a Debt Relief Program Group, the fee amount can vary by client and is based on the amount of the debt the client enrolls in the program, as well as, the state in which they live. Across the debt relief industry, fees can range from 18 to 25 percent on the enrolled debt.
Bankruptcy is VERY different. First of all, ALL of your debt is included in the bankruptcy, you can not pick and choose which debts to put into bankruptcy. Whether you file a Chapter 7 or a Chapter 13, there is a filing fee. Chapter 7 is $335 and Chapter 13 is $310. Everyone who files for bankruptcy must take a Credit Counseling Course. Those usually range from $18.00 to $35.00. After that, it is your attorney fee, which you can discuss with your counsel. IF you are a Chapter 13, the monthly payment you make to your Trustee will also include his/her fee. In New Jersey, the Chapter 13 Trustee Fee is between 8 and 10%.
In a Chapter 13, there is a Chapter 13 Trustee who is appointed by the Department of Justice. He or She oversees all the Chapter 13 cases in her Vicinage (New Jersey has 3 Chapter 13 Trustees, Newark, Trenton and Camden.) Your Counsel will help you develop a Chapter 13 Plan which is submitted to the Court, the Chapter 13 Trustee and the Creditors. The Chapter 13 Trustee and the Creditors can each object to the Plan for a myriad of reasons, but for here and the sake of discussion, let's say there are no objections, so the Proposed Plan then becomes a Confirmed Plan. To pay for the Chapter 13 Program, the Federal Government has the Chapter 13 Trustee take a commission from every plan. The rate of Commission is a little different in each of the Federal Circuits, but in New Jersey it is about 10%. That Commission is based upon the entire amount to be paid into the Chapter 13 Plan, and is taken out monthly. So if your Chapter 13 Payment is $400 per month, the Trustee gets $40.00 of that per month. Also remember, you are no longer making ANY payments on your unsecured debt. This is a direct contrast to Debt Relief Programs, where you continue to make payments on the debt that you did not enroll.
Can I negotiate debt relief on my own?
According to a Debt Relief Program Group, and having tried to do this for clients, you certainly can pick up the phone, call your creditors, and try to negotiate settlements with them yourself. I strongly urge you not to take this route. Most of the creditors want a large single lump sum payment, or two large payments (the second they will automatically deduct from your account).
In bankruptcy, you do not do this. As has been stated several times, in a Chapter 7, all your debt, except as indicated previously, is discharged. In a Chapter 13, a Creditor MUST file a Proof of Claim to get paid, and they get paid according to the confirmed Chapter 13 Plan. Any portion of the bill that is not paid, if you complete your Chapter 13, is discharged and forgiven forever.
Debt relief credit impact
According to a Debt Relief Program Group, depending on your credit health, enrolling in a debt relief program that involves debt settlement could hurt your credit in the short term. This is due to the fact that a debt settlement program involves stopping payments on accounts while settlements are negotiated with creditors. Missed payments are a strike against you when credit monitoring agencies calculate your credit score. The Debt Relief Program will also tell you that its effect on your credit score is less than if you file for bankruptcy. I highly disagree
When you file for bankruptcy, whether it is Chapter 7 or Chapter 13, it is noted on your credit report. It is on your credit report for 7 - 10 years. The fact is, if you are filing for bankruptcy, chances are that you're behind in your payments. It could be 2 months or it could be 6 months or a year, but the fact of the matter is that the creditors have been putting delinquencies on your report. Bankruptcy stops them from doing that. All the time that you or the debt relief program is "negotiating", the creditors continue to mark your delinquent. As was stated above, the automatic stay prevents the creditors from taking that action. Further, according to many of the credit reporting agencies, the bankruptcy demarcation actually helps because it shows a definitive action by the person who owes the money and within a year, the impact lessens.
Does debt relief get rid of all my debt?
Unlike bankruptcy, a Debt Relief Program can only help with unsecured debts. These are debts that have no collateral securing them. Examples are credit card debt, personal loan debt, medical debt, and some business debt. Debt Relief Programs can not help you with a mortgage, auto loans, or any other type of collateralized debt you may have.
Bankruptcy does and can help with all types of debt.
Will my creditors take legal action if I choose debt relief?
Debt Relief Programs acknowledge that it can be months between the time when you stop paying creditors and the time when they begin negotiating with the creditors. During this time, creditors may call you, may sell your debts to a debt collector, or even take legal action.
Once you file for bankruptcy, the provisions of 11 U.S.C. §362 (also known as the Automatic Stay) go into effect. Creditors are required to cease and desist from ANY and all collection attempts or practices. This means no more harassing calls, no more threatening letters, AND the Creditors are forbidden from instituting or continuing any and all legal proceedings to collect the debt WITHOUT permission from the Bankruptcy Court
If you want to discuss your specific situation, feel free to contact the Law Office of Stuart M. Nachbar, at (973) 233-4049, or email via our website www.snanj.com. We are now handling initial matters (consults) via Zoom Media, RingCentral or just via the phone if you are more comfortable in that setting. We have the ability to send out our client question sheets and credit counseling via email. We offer a free no-cost consultation to every person who mentions this advertisement, and we are conveniently located at 354 Eisenhower Parkway, Suite 2025 in Livingston, New Jersey. We handle Chapter 7 and Chapter 13 cases for all of Northern and Central New Jersey.
