Settling credit card debt – hidden risks and how to overcome them

When you are deeply in debt and searching for a way out, it might get overwhelming very quickly.  You may discover that there are credit card debt settlement companies that could help you in settling credit card debt. In fact, they offer to make your debt go away and they could do it cheaply. Truth is, there are some risks debt settlement. However, it may still be your best option out of crippling debt.

However, you should know that the good offer comes with some downfalls which you should take note of when making your decision. Rushing into something is never a good idea. That is why we want to help you make an informed choice in this article.

What are debt settlement companies?

What are debt settlement companies?

What are debt settlement companies?

Debt settlement companies offer debt settlement programs which normally consist of a series of steps. Their job is to negotiate your debts with your creditors and resolve them either in part or in full. They will reach a “settlement” with your creditors which is a lump sum payment that is less than what you actually owe. Of course, you still have to pay that lump sum.

You will be asked to put in monthly payments in a special savings account until a settlement is reached. It might sound tough to keep up with those monthly payments. However, when you are in debt, you have to pay back one way or another anyway.

Another thing is that debt settlements are typically offered by pro-profit organizations, meaning that they make money in the process. For debt settlement companies, it is a business like any other and it is not unusual to benefit from what they do.

Moreover, some debt settlement programs will request you not to make any payments to your creditors while you are part of the program. They might even ask you not to communicate with them in any way. Even though that might seem hurtful for you in the first place, any action on your part might harm future negotiations with your creditors.

The risks of credit card debt settlement

risks of credit card debt settlement

risks of credit card debt settlement

Debt settlement companies are able to settle one or more of your debts. At what cost though?

  1. You would probably be required to deposit money in your special saving account for up to two years before all your debt can be settled. That equals to 36 monthly payments. Many people find it impossible to keep up and as a result, drop out of the debt settlement program. Although that is a bad way out of the situation, it can be easily avoided through careful planning. When you have reviewed and planned your budget, you will be able to make the monthly payments. All you need to do is make sure you can keep up with the payments until the end of the debt settlement program. In any case, that sounds better than being chased by your creditors
  1. Although it is the established practice, some of your creditors may not agree to negotiate your debt. They are under no obligation to negotiate with your debt settlement company once they approach them to reach an agreement. So there is some chance your debt settlement company may not be able to settle some of your debt. However, that was never the deal. They have promised to settle your debt either partly or in whole.It is your responsibility who you start owing and how hard it is to deal with them later.
    In most cases, your debt settlement company would be useful to you because they work with creditors on a daily basis and have established relations with your creditors.They know what to expect and how to proceed so they will have a realistic idea what can be achieved. All you need to do is discuss your expectations with your debt settlement company and be clear of what they can offer. You need to be realistic too. In case you don’t have your debt settlement to settle your debt, you will have to deal with those hard nosed creditors on your own.
  1. Your debt settlement company may settle your smaller debts first. That means interest and fees on your bigger ones might go up in the meantime. The problem with being too much into debt is you often end up with many different debts owed to many different creditors. To be debt-free, you need a strategy. Reducing the amount of debt is one of them. Many creditors would be much more willing to negotiate with someone who has two creditors than with someone who has 50.
  1.  You might get calls from your creditors or debt collectors requesting you to pay again. Although those might be unpleasant, you should know they do not have the legal right to be paid twice for the same debt. If you want to stay out of trouble, do not do anything rash. It is probably best if you consult your lawyer. The important thing is not to let yourself become an easy victim. If they see they have a chance to deceive you, they will use it and might even sue you for not paying up. All you have to do is be prepared and know your rights.
  1.  Being part of a debt settlement program might have some negative effect on your credit report. That is because debt settlement programs often encourage you to stop sending payments directly to your creditors. However, it is an inevitable temporary situation that will change once you are out of debt. What can be better for your credit report than being debt free? Anyway, in most cases, you have a choice how to proceed so it is up to you.

How to avoid debt settlement scams?

How to avoid debt settlement scams?

How to avoid debt settlement scams?

Take your time when choosing the right credit card debt collecting company. There area  few ways in which they might try to deceive you and leave you with nothing of what they have promised. The most popular debt settlement scams are:

  1.  Some companies try to charge you fees before they have settled any of your debt. Although at some point that may sound reasonable as they are providing you a service, you should know that in this situation, you are paying for nothing because you have no actual guarantee that they will fulfill whatever promises they have given you.Another thing is that such a practice is forbidden by the Federal Trade Commission (FTC) in its Telemarketing Sales Rule (TSL) for companies engaged in telemarketing those services. However, you can be certain that you will find a debt settlement company which will not try to scam you. You just need to be careful with your selection.
  1. Some companies fail to explain the risks that come with their debt settlement programs. Many of the things you can expect though you can find in this article and some of them surely you can figure out on your own. Your debt settlement company is not obliged to simplify everything for you. Their job is to make your debt go away. Usually, they will fulfill their promises to you, regardless of whether they have told you everything or not.
  1. Some debt settlement companies claim that they can make your unsecured debt go away or that it can be paid for pennies on the dollar. Although, this is exactly how it works with a secured debt, it might go in a slightly different manner when it comes to an unsecured one. That involved a higher level of uncertainty and risks that unsecured debt has for the lender. An unsecured debt is simply said- a loan that is not backed up by any underlying assets. Your credit card debt falls under that category.
    The only reason someone would be willing to extend such a loan is because they expect a full repayment. That is why many unsecured creditors are not be willing to negotiate with your credit card debt settling company. They might even want to sue to get back what you owe them. That is very reasonable behavior and it should not surprise you. However, some debt settlement companies can actually help you resolve your unsecured debt. Follow your track record, talk with satisfied clients of your preferred debt settlement company and decide whether to believe their promises or not.
  1.  Some credit card debt settlement companies will request you to stop communicating with your creditor.That is because it is the standard practice. However, you may want to avoid a debt collecting company that takes that step without explaining to you what risks may come with it.Some of which may include you receiving unwanted debt collection calls, be requested to make repayments or even get sued which may affect your credit record sometimes. You want to be aware of the risks you are taking even when the debt collection company’s requests for you to stop communication with your creditors seem reasonable and necessary.
  1. Some credit card debt settlement companies may even try to promise you that they are making all debt collectors calls and managing lawsuits. Although it is possible that those companies have worked with your creditors in the past and have reached some kind of an agreement on debt settlement, it is usually a wise choice to avoid debt settlement companies that make such promises.
    For one thing, those promises are very hard to keep. They depend entirely on a third party’s behavior and a creditor may change their mind anytime before the debt is settled. Be smart and stay away from credit card debt settlement companies that try to sugarcoat the process for you. If you really want to stay out of trouble and out of debt, find a credit card debt settlement company which you can trust.

How to choose good credit card debt settlement company?

How to choose good credit card debt settlement company?

How to choose good credit card debt settlement company?

The most secure thing you can do is choose your credit card debt settlement company carefully. There are a few things you can consider:

Research
You do not want to go into business with a scamming company. You will spend a lot of your money in the processes of collecting the lump sum required by the program. Don’t just throw those away. You have two options- you can check the company with your state Attorney General or with your local consumer’s protection agency.

Preferably, do both. From the local consumer protection agency, you can learn if there are any  consumer complaint against the company you are thinking of working with. Moreover, your state Attorney General can provide you with another kind of useful information – whether the credit card debt settlement company you have chosen is required to be licensed in your state and if so, whether it is licensed.

Another thing we recommend you to do is to enter the name of your debt settlement company of your choice into search engines. There you can see what others have said about it. You can also find out if there are state or federal lawsuits against it for being part of scam schemes.

You can also request the company to introduce you to some of their previous clients or ask for such among your circle of acquaintances. However, bear in mind that the things you heard may not be true. It is the same with the opinions you find on the Internet. Most companies are aware their potential clients will do a background check on them. Therefore, they can purposefully add positive comments on their business through fake profiles. Be critical of the information you receive.

What are the fees involved when settling credit card debt?

  1. What are the fees involved?

    What are the fees involved?

       Bank account manager fee
    When you become part of credit card debt settlement program, you would be required to put money in a dedicated bank account. However, this account will be managed by an independent third party. You may expect to be charged for this service.

    You are still entitled to the interest from your money in the bank but that money would be used for payment to your creditors and for the fees you owe your debt settlement company. It is your account manager’s job to make repayments from your account. That is why you are paying him a fee for his service.

  1.    Credit card debt settlement company fee
    As mentioned above, you are not supposed to pay your debt settlement company in advance. You are only required to pay them after they have settled some of your debts. Even so, you are not supposed to pay them the full fee. They can only receive part of the fee for the amount of debt they have settled for you.

    How does that work? For example, you have ten creditors and your debt settlement company has reached a settlement with only four of them. Therefore, they can receive only a quarter of their full fee or 40%. That goes for each successful settlement they make. For example, they managed to negotiate two more of your debts, they are entitled to another 20% of their full fee.
    In some cases, the company’s fee is based on the amount you save through the settlement. Because they are negotiating for you to pay cents on each dollar you owe. In case you owe $10,000 and they manage to settle your debt for $8,000, you are saving $2,000. They sometimes would base their fee on this amount. This is known as “contingency” fee.

What information should your credit card debt settlement company provide you with?

 information before signing up for any debt settlement service

information before signing up for any debt settlement service

Important: You should receive the following information before signing up for any debt settlement service. It is important for you to have know in advance to be clear about what you are getting yourself into.

  1.    Price and terms
    The debt settlement company you have chosen must provide you with detailed information of their terms and conditions. That is what they will require from you once you become part of their debt settlement program. They should also explain how much they will charge you for each thing so you are clear about how much the full service will cost and decide whether you can afford it.
  1.    Results

    results

    results

    They should clarify what they can help you to achieve within a certain time frame.The debt settlement whole process could take approximately three to four months but it varies from case to case. It is your debt settlement company job to set a time frame. You don’t want to be left disappointed with unrealistic expectations.

  1.    Offers
    This means that before they reach a settlement with your creditors, you should reach a settlement with them. They must tell you how much money you should save before they go make an offer to your creditors. That amount is the sum you need to have in your special savings account as part of the debt settlement program.
  1.    Non payments
    The debt settlement company must inform you whether you are required to stop making repayments to your creditors and let you know how that can affect you.

Other information you should know:

–    Although they stay in a separate saving account, you still own that money and you are entitled to interest from the bank

–    Normally, you should be allowed to withdraw your money anytime without a penalty unless you have explicitly agreed to something else in your agreement with the debt settlement company. Otherwise, you would be a victim of theft and should seek legal protection. In any case, make sure you know what you are signing with the debt settlement company.

–    The account administrated should be a third independent party. He should not be affiliated with the debt relief company. Therefore, he is not entitled to refer fee. Make sure they are not charging you for such.

What are the tax consequences of being part of a debt settlement program?

 tax consequences

tax consequences

Although you are saving a lot of money by joining a debt settlement program, some of them may be considered income and taxable by the relevant authorities. This depends on your personal financial situation. What savings from the debt settlement program may be considered taxable?

In some cases, credit card companies may report your settled debt to the IRS. For taxing purposes, that would be considered income. There is one exception and that is the case of insolvency. If you are “insolvent”, it will not be considered as income. However, it is a complex issue and may be hard to determine.

It is recommended that you talk to a tax consultant to be sure you are classified under this exception. Insolvency occurs when your total debts are more than the fair market value of your total assets. A fair market value is an estimate market value that an average knowledgeable buyer would be willing to pay to an average knowledgeable seller on the market. This value should represent an accurate valuation or assessment of its worth.

What other debt relief options do you have?

  1.    Talk with your credit card company on your own
debt relief options

debt relief options

Depending on how good you are at negotiating, you may consider consulting your credit card company on your own. Remember, this can go wrong in many ways as there is no way for you to know how they may respond. The last thing you want is to get on the wrong foot with your creditors. Also, they may turn you down.

If you don’t pay your debt for 180 days, your creditor will write it off as a loss. After that, they may be unwilling to negotiate with you. That is because they are already at a loss and don’t have the interest to reduce your repayment. They might be better if they sue you for the full amount you owe them. On the other hand, a debt settlement company in most cases will be able to negotiate a better deal on your behalf.

  1.    Contact a credit counselor

Credit counseling organizations can advise you on how to manage your money if you believe advice would be enough to help you make your debt go away. Credit counselors will discuss your financial situation with you and come up with a plan. Although they work for non – profit organizations, it doesn’t mean their services are free. In many cases, their services will be neither affordable nor legitimate. Many credit counseling organizations charge high fees or encourage their customers to make “voluntary” contributions (that can lead you into more debt).

You should also check if the credit counseling organization is government-approved. The U.S. Trustee Program (part of the U.S. Department of Justice) has a list of all government-approved organizations.

  1.    File for bankruptcy
 File for bankruptcy

File for bankruptcy

Filing for bankruptcy has serious consequences. In fact, it can be one of the worst options. It will lower your credit score dramatically. Also, the filing process is hard and long. You are facing a repayment plan again – the only difference is that it should be approved by the court. It will also last longer from three to five years.
The only good thing is that after you have made all payments under the plan, your debts are discharged. Have in mind that you may not reach this point and find it very hard to make the required payments should you consider filing for bankruptcy.

There are also some specific requirements in the filing process. You must get credit counseling for six months before you can file for bankruptcy. It should also be done by a government- approved organization. There are many government fees you need to pay on top of varying attorney fees.

Filing for bankruptcy is the one thing you should try to avoid. Seek help from a professional credit card debt settling company instead.

Which option is best for you?

The financial situation for every individual is different. There are a couple of possible solutions for your current debt situation but you should bear in mind that everything comes with certain amount of risk and possible negative effects. Credit card debt settlement remains the easiest and fastest way to become debt-free by far.

Chapter 7 bankruptcy for individuals

What is Chapter 7 bankruptcy?

In Chapter 7 bankruptcy, the bankruptcy trustee cancels many (or all) of your debts. At the same time, the trustee might also sell (liquidate) some of your property to repay your creditors. Chapter 7 bankruptcy, also called “straight” or “liquidation” bankruptcy, is so named because the law is contained in Chapter 7 of the federal Bankruptcy Code. Here’s an overview of Chapter 7 bankruptcy for individuals – who can file, the forms you’ll need, how the process works, and what happens to your property and debts.

Chapter 7 bankruptcy for individuals
The automatic stay

The automatic stay

The whole Chapter 7 bankruptcy process takes about four to six months, costs $335 in filing and administrative fees and commonly requires only one trip to the US bankruptcy courthouse.

The debtor should consult a bankruptcy attorney before taking any action.You must complete credit counseling with a bankruptcy lawyer or agency approved by the United States Trustee.

Chapter 7 bankruptcy liability

Filing for bankruptcy won’t be possible if you had already received a bankruptcy discharge in the last six to eight years (depending on which type of bankruptcy you had filed for) or if, based on your income, expenses and debt burden, you could feasibly complete a Chapter 13 repayment plan.

Bankruptcy forms

To file for Chapter 7 bankruptcy for individuals, you fill out a petition and a number of other forms and file them with the bankruptcy court in your area. The forms will ask you to describe:

1. your property

2. your debts

3. your current income and monthly living expenses

4. property you claim the law allows you to keep through the Chapter 7 bankruptcy process (called “exempt property”). Most states let you keep some equity in your home, clothing, household furnishings, Social Security payments you haven’t spent and other necessities such as a car and the tools of your trade

5. property you owned and money you spent during the last two years

6. property you sold or gave away during the last two years.

The automatic stay

Filing for Chapter 7 bankruptcy puts into effect something called the “automatic stay.” The automatic stay immediately stops most creditors from trying to collect what you owe them. So, at least for the time being, creditors won’t be able to legally grab (“garnish”) your wages, empty your bank account, go after your car, house or other property, or cut off your utility service.

Bankruptcy court control over your financial affairs

By filing for Chapter 7 bankruptcy, you are technically placing the property you own and your debts in the hands of the US bankruptcy court. You can’t sell or give away any of the property you own when you file or pay off your pre-filing debts without the court’s consent. However, with a few exceptions, you can do what you wish with the property you acquire and income you earn after you file for bankruptcy.

Chapter 7 bankruptcy trustee

The court exercises its control through a court-appointed person called a bankruptcy trustee. The trustee’s primary duty is to see that your creditors are paid as much as possible of what you owe them. The more assets the trustee recovers for creditors, the more the trustee is paid.

The trustee (or the trustee’s staff) will examine your papers to make sure that they are complete and look for nonexempt property to sell for the benefit of creditors. The trustee will also look at your financial transactions during the previous year to see if any can be undone to free up assets to distribute to your creditors. In most Chapter 7 bankruptcy cases, the trustee finds nothing of value to sell.

The creditors meeting

A week or two after you file, you (and all the creditors you list in your bankruptcy papers) will receive a notice that a “creditors meeting” has been scheduled. The bankruptcy trustee runs the meeting and, after swearing you in, may ask you questions about your bankruptcy and the papers you filed. In most Chapter 7 bankruptcies, this is the debtor’s only visit to the courthouse.

creditors meeting

creditors meeting

Property situation

After the creditors meeting, if the trustee determines that you have some nonexempt property, you may be required to either surrender that property or provide the trustee with its equivalent value in cash. If the property isn’t worth very much or would be cumbersome for the trustee to sell, the trustee may “abandon” the property. This means that you get to keep it, even though it is nonexempt. However, which property is exempt varies by state.

Most property owned by Chapter 7 debtors is either exempt or is essentially worthless for purposes of raising money for the creditors. As a result, few debtors end up having to surrender any property, unless it is collateral for a secured debt.

Your secured debts
Your secured debts

Your secured debts

 

If you’ve pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are automobiles and houses. If you’re behind on any of your payments, the creditor can ask to have the automatic stay lifted in order to repossess or foreclose on the property. However, if you are current on your payments, you can keep the property and keep making payments as before, that is unless you have enough equity in the property to justify it’s sale by the trustee.

If a creditor has recorded a lien against your property because of a debt you haven’t paid (for example, because the creditor obtained a court judgment against you), that debt is also secured. You might be able to wipe out the lien in Chapter 7 bankruptcy.

Chapter 7 bankruptcy discharge

A discharge releases individual debtors from personal liability for most debts and prevents the creditors from taking any collection action against the debtor. Because a Chapter 7 discharge is subject to many exceptions, debtors should consult a bankruptcy lawyer before filing to discuss the scope of the discharge. Generally, excluding cases that are dismissed or converted, individual debtors receive a discharge in more than 99% of Chapter 7 cases. In most cases, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will issue a discharge order relatively early in the case – generally, 60 to 90 days after the date first set for the meeting of creditors.

 

 

Chapter 7 bankruptcy: all you need to know

There’s no question that deciding whether to declare bankruptcy is very difficult. It affects your future credit, reputation and self-image. However, it could improve your short-term quality of life considerably as debt collection calls and letters stop. Let’s look into Chapter 7 bankruptcy in depth so that you can see what it is and understand how it works. 

  • What is Chapter 7 bankruptcy?

Chapter 7 bankruptcy is a liquidation proceeding in which the debtor’s non-exempt assets, if any, are sold by the Chapter 7 trustee and the proceeds distributed to creditors according to the priorities established in the Code.
Eligibility for file Chapter 7 is determined by the means test instituted with the 2005 amendments to the bankruptcy code.

What is Chapter 7 bankruptcy?
In most consumer cases, all assets are exempted. Therefore, there are no assets to liquidate and there is no dividend to creditors. Chapter 7 is generally the simplest and quickest form of bankruptcy and is available to individuals, married couples, corporations and partnerships.

  • Chapter 7 eligibility

In order to be eligible for chapter 7 bankruptcy, the debtor may be an individual, a partnership, or a corporation or other business entity. Subject to the means test described above for individual debtors, relief is available under Chapter 7 irrespective of the amount of debt or whether the debtor is solvent or insolvent. However, an individual can’t file under Chapter 7 or any other chapter, if during the preceding 180 days a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply orders of the court, or if the debtor voluntarily dismissed the previous case after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.

In addition, no individual may be a debtor under Chapter 7 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during the required credit counseling, it must be filed with the court.

One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” The debtor has no liability for discharged debts. In a Chapter 7 case, however, a discharge is only available to individual debtors, not to partnerships or corporations. An individual Chapter 7 case usually results in a discharge of debts. However, the right to a discharge is not absolute and some types of debts are not to be discharged. Moreover, a bankruptcy discharge does not extinguish a lien on a property.

  • How does Chapter 7  work?

How does Chapter 7 work?

How does Chapter 7 work?

A Chapter 7 case starts with the debtor filing a petition with the bankruptcy court serving the area where he lives or where the business debtor is organized or has its principal place of business or principal assets. In addition to the petition, the debtor must also file with the court for the following:

1. schedules of assets and liabilities

2. a schedule of current income and expenditures

3. a statement of financial affairs

4. a schedule of executory contracts and unexpired leases

Debtors must also provide the assigned case trustee a copy of the tax returns or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began). Individual debtors with primarily consumer debts have additional document filing requirements. They must file:

1. a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling

2. evidence of payment from employers received 60 days before filing if any

3. a statement of monthly net income and any anticipated increase in income or expenses after filing

4. a record of any interest the debtor has in federal or state qualified education or tuition accounts

A husband and wife may file a joint petition

A husband and wife may file a joint petition

A husband and wife may file a joint petition or individual petitions. Even if filing jointly, they are subject to all the document filing requirements of individual debtors. (Since they are not available from the court, the Official Forms may be purchased at legal stationery stores or downloaded from the internet.)


The courts must charge a $245 case filing fee, a $75 miscellaneous administrative fee, and a $15 trustee surcharge. Normally, the fees must be paid to the clerk of the court upon filing. With the court’s permission, however, individual debtors may pay in installments. The number of installments is limited to four and the debtor must make the final installment no later than 120 days after filing the petition.

The court may also extend the time of any installment provided that the last installment is paid no later than 180 days after filing the petition. The debtor may also pay the $75 administrative fee and the $15 trustee surcharge in installments. If a joint petition is filed, only one filing fee, one administrative fee and one trustee surcharge are charged. Debtors should be aware that failure to pay these fees may result in dismissal of the case.

If the debtor’s income is less than 150% of the poverty level (as defined in the Bankruptcy Code), and the debtor is unable to pay the Chapter 7 fees even in installments, the court may waive the fee requirement.

To complete the Official Bankruptcy Forms that make up the petition, a statement of financial affairs and schedules, the debtor must provide the following information:

1. a list of all creditors, the amounts and nature of their claims

2. the source, amount and frequency of the debtor’s income

3. a list of all of the debtor’s property  

4. a detailed list of the debtor’s monthly living expenses, i.e. food, shelter, clothing, utilities, transportation, taxes, medicine, etc.     

information required

information required

Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse are required so that the court, trustee and creditors can evaluate the household’s financial position.


Among the schedules that an individual debtor will file is a schedule of “exempt” property. The Bankruptcy Code allows an individual debtor to protect some property from the claims of creditors because it is exempt under federal bankruptcy law or under the laws of the debtor’s home state. Many states have taken advantage of a provision in the Bankruptcy Code that permits each state to adopt its own exemption law in place of the federal exemptions.

In other jurisdictions, the individual debtor has the option of choosing between a federal package of exemptions or the exemptions available under state law. Thus, whether certain property is exempt and may be kept by the debtor is often a question of state law. The debtor should consult a bankruptcy attorney to determine the exemptions available in the state where the debtor lives.


Filing a petition under Chapter 7 “automatically stays” (stops) most collection action against the debtor or the debtor’s property. However, filing the petition does not stay certain types of actions listed under and the stay may be effective only for a short time in some situations. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments or even telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.


Between 21 and 40 days, after the petition is filed, the case trustee will hold a meeting of creditors. If the U.S. trustee or bankruptcy administrator schedules the meeting at a place that does not have regular U.S. trustee or bankruptcy administrator staffing, the meeting may be held no more than 60 days after the order for relief. During this meeting, the trustee puts the debtor under oath, and both the trustee and creditors may ask questions.

The debtor must attend the meeting and answer questions regarding the debtor’s financial affairs and property. If a husband and wife have filed a joint petition, they must both attend the creditors’ meeting and answer questions. Within 10 days of the creditors’ meeting, the U.S. trustee will report to the US bankruptcy court whether the case should be presumed to be an abuse under the means test described in 11 U.S.C. § 704(b).

The debtor should cooperate with the trustee and provide any financial record or document that the trustee requests. The Bankruptcy Code requires the trustee to ask the debtor questions at the meeting of creditors to ensure that the debtor is aware of the potential consequences of seeking a discharge in bankruptcy such as the effect on credit history, ability to file a petition under a different chapter, effect of receiving a discharge, and the effect of reaffirming a debt. Some trustees provide written information on these topics at or before the meeting to ensure that the debtor is aware of this information. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors.

In order to accord the debtor complete relief, the Bankruptcy Code allows the debtor to convert a Chapter 7 case to a case under chapter 11, 12, or 13 as long as the debtor is eligible to be a debtor under the new chapter. However, a condition of the debtor’s voluntary conversion is that the case has not previously been converted to Chapter 7 from another chapter. Thus, the debtor will not be permitted to convert the case repeatedly from one chapter to another.

  • Role of the trustee

Role of the trustee

Role of the trustee

The court exercises its control through a court-appointed person called a “bankruptcy trustee.” The trustee’s primary duty is to see that your creditors are paid as much as possible of what you owe them. The more assets the trustee recovers for creditors, the more the trustee is paid.

The trustee (or the trustee’s staff) will examine your papers to make sure they are complete and look for non-exempt property to sell for the benefit of creditors. The trustee will also look at your financial transactions for the previous year to see if any can be undone to free up assets to distribute to your creditors. In most Chapter 7 bankruptcy cases, the trustee finds nothing of value to sell.

  • The creditors meeting

A week or two after you file, you (and all the creditors you list in your bankruptcy papers) will receive a notice that a “creditors meeting” has been scheduled. The bankruptcy trustee runs the meeting and, after swearing you in, may ask you questions about your bankruptcy and the papers you filed. In the vast majority of Chapter 7 bankruptcies, this is the debtor’s only visit to the courthouse.

  • What happens to your property

What happens to your property

What happens to your property

After the creditors meeting, if the trustee determines that you have some non-exempt property, you may be required to either surrender that property or provide the trustee with its equivalent value in cash. If the property isn’t worth very much or would be cumbersome for the trustee to sell, the trustee may “abandon” the property — which means that you get to keep it, even though it is non-exempt. (For information on which types of property are typically exempt, see When Chapter 7 Bankruptcy Isn’t the Right Choice.) However, which property is exempt varies by state. You can find your state’s exemptions in Bankruptcy Exemptions by State.  

Most property owned by Chapter 7 debtors is either exempt or is essentially worthless for purposes of raising money for the creditors. As a result, few debtors end up having to surrender any property, unless it is collateral for a secured debt (see below). To get a better understanding of what may happen to your property in bankruptcy, check out Nolo’s legal area on Bankruptcy Exemptions and Your Property.

  • How your secured debts are treated

If you’ve pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are houses and automobiles. If you’re behind on your payments, the creditor can ask to have the automatic stay lifted in order to repossess or foreclose on the property. However, if you are current on your payments, you can keep the property and keep making payments as before — unless you have enough equity in the property to justify its sale by the trustee.
If a creditor has recorded a lien against your property because of a debt you haven’t paid (for example, because the creditor obtained a court judgment against you), that debt is also secured. You may be able to wipe out the lien in Chapter 7 bankruptcy.

  • Chapter 7 bankruptcy discharge

At the end of the bankruptcy process, all your debts are wiped out (discharged) by the court, except:

1. debts that automatically survive bankruptcy, such as child support, most tax debts and student loans, unless the court rules otherwise

2. debts that the court has declared non-dischargeable because the creditor objected (for example, debts incurred by your fraud or malicious acts).

  • Chapter 7 bankruptcy pros and cons

Pros & cons

Pros & cons

Here is a list of pros and cons to consider as you decide whether Chapter 7 bankruptcy is the best option for you.

  • Chapter 7 bankruptcy pros:

1. Although a bankruptcy stays on your record for years, the time to complete the bankruptcy process under Chapter 7, from filing to relief from debt, takes only about 3-6 months. So, the trade-off is a lasting mark against your credit in exchange for freedom from most debt. If you decide against Chapter 7 when it may be the right decision for you, your missed debt payments, defaults, repossessions and lawsuits will also hurt your credit, and may be more complicated to explain to a future lender than bankruptcy.

2. Most state exemptions allow you enough so that most things you own will be exempt from bankruptcy, sometimes allowing more coverage to keep your property than you need. Additionally, you will get to keep the salary or wages you earn and the property you buy after you file for Chapter 7.

3. Your credit cards probably got you in this mess to start with, so it’s hard to see that as a bad thing. You may also be able to obtain new lines of credit within one to three years of filing bankruptcy, although at a much higher interest rate.

4. There are lenders who specialize in lending to “bad risks,” although that is an unfair characterization to make of someone who has taken a major step to solve financial difficulties.

5. Declaring bankruptcy now can get you started sooner on rebuilding your credit. Although you can only file under Chapter 7 once every six years, you can always get a Chapter 13 plan if there is another disaster before you are entitled to file Chapter 7 again. You may file for a Chapter 13 plan repeatedly, although each filing appears on your credit record.

6. Short of a court order from a family court, nothing else will relieve you of your alimony and child support obligations. However, bankruptcy will alleviate many of your other financial obligations.

7. Nothing will get rid of student loan debt. However, bankruptcy will prevent your lenders from aggressive collection action.

8. Both judges and trustees have heard far worse stories than yours.

9. If, however, you obtained a Chapter 13 discharge in good faith after paying at least 70% of your unsecured debts, the six-year bar does not apply.

10. You can avoid these harsh limitations against refiling for bankruptcy by observing all court orders and court rules and by not asking to have your case dismissed when a creditor asks for relief from the stay. Even if these limitations apply to you, they don’t last forever. You’re only prevented from refiling for a period of six months. It may make sense to at least consult an attorney prior to filing for bankruptcy to avoid limiting your bankruptcy options in the future.

11. If you don’t owe money on the type of debts that survive bankruptcy, the amount and number of debts that a bankruptcy court can relieve you from paying is potentially unlimited.

12. Chapter 7 does not require that you have debts of any particular amount to file for relief. However, even if your case gets converted to Chapter 13, it can still improve your financial situation by obtaining more favorable terms to pay off your debts. With Chapter 13, you get to keep all your property as well.

  • Chapter 7 bankruptcy cons:

Bankruptcy will ruin your credit

Bankruptcy will ruin your credit

1. Bankruptcy will ruin your credit for some time to come. A Chapter 7 bankruptcy can remain on your credit report for up to 10 years.

2. You will lose property that you own that is not exempt from sale by the bankruptcy trustee. You may lose some of your luxury possessions.

3. You will lose all your credit cards.

4. Bankruptcy will make it nearly impossible to get a mortgage if you don’t already have one.

5. Declaring bankruptcy now might make it harder to do later if something worse comes along. For instance, if you complete the bankruptcy process under Chapter 7, you cannot file for another Chapter 7 bankruptcy for six years. The six years is counted from the date you last filed for bankruptcy.

6. Bankruptcy will not relieve you of your obligations to pay alimony and/or child support.

7. Bankruptcy will not get rid of your student loan debt.

8. You will have to explain to a judge or trustee how you got into the financial mess.

9. You cannot file for Chapter 7 bankruptcy if you previously went through bankruptcy proceedings under Chapter 7 or Chapter 13 within the last six years.

10. You cannot file for Chapter 7 bankruptcy if a previous Chapter 7 or Chapter 13 case was dismissed within the past 180 days because:

11. you violated a court order, or you requested the dismissal after a creditor asked for relief from the automatic stay

12. You may still be obligated to pay some of your debts, such as a mortgage lien even after bankruptcy proceedings are completed.

If you file for Chapter 7 relief but have a certain amount of disposable income, the bankruptcy court could convert your Chapter 7 case to a Chapter 13. This changes your plan to be free from most debts within four to six months to a plan requiring you to repay your debts over the course of three to five years.

           

Should I try to settle myself, use a lawyer, or a specialist company?

This is the question that most debtors ask themselves when trying to figure out the best way to go about clearing their debt. Each situation is different and the circumstances of your debt will determine whether you will have to settle by yourself or if you will have to hire the services of a lawyer or the services of a specialist company. Debt settlement is a situation whereby you negotiate with your creditors, using lawyers or specialist companies or by yourself, to have the amount owed reduced. Before considering how to solve your debt issues, please first read our debt consolidation myths page.

Hiring a lawyer will come in handy when you need someone to analyze your situation and give you legal advice that is practical.

Hiring a lawyer will come in handy when you need someone to analyze your situation and give you legal advice that is practical.

Hiring a lawyer will come in handy when you need someone to analyze your situation and give you legal advice that is practical. A lawyer will be able to advise you if you will have to settle your debts or file for bankruptcy, depending on your situation. Also, should the creditor sue you, a lawyer will be able to defend your case in court. Ensure that your attorney is licensed and one who values integrity by upholding the ethical standards.

You may opt to use a company to help you to consolidate your credit card debt or for payday loan help and make the process of clearing debt easier although this is completely unnecessary. The debt settlement companies require that you pay them a monthly amount while they negotiate with your creditors. The amount that you pay is then divided into savings that will be used in paying off your debt as well as the service fee charged for the work they are doing on your behalf. When you have a number of credit card debts, you may opt to take a credit card consolidation loan and worry about one payment. When you consolidate credit cards, you will be able to get the lowest interest rates and benefit in making lesser payments over time as compared to paying the credit card debts individually. The debt consolidation companies will be able to advise you on how to consolidate credit card debt. This will enable you to sort your finances as there will be no more hassle of making multiple credit cards and debt payments and you will be able to possibly increase your cash flow because bill consolidation reduces the monthly expenses.

Choose to settle yourself,

Choose to settle yourself,

You may opt not to hire the services of a lawyer, specialist companies such as a debt settlement company or to settle for debt settlement so as to get credit card debt relief. This may be because you are wondering how you may afford such services yet you are already struggling with your debts. Should you choose to settle yourself, you will have to equip yourself with the knowledge and laws related to debt collection. It is better to do debt settlement by yourself when you are certain that this is the choice that you will settle for and if your creditors are yet to start suing you for the debt owed.

While considering debt settlement, the option that you will settle for depends on your financial situation. Also, while you may hire the services of a lawyer or specialist companies, be sure to get legitimate ones so that you may not end up losing your money to scams.

How to negotiate with a debt collector

Falling behind your payments for a credit card debt

Falling behind your payments for a credit card debt

Falling behind your payments for a credit card debt or any other type of loan is never pleasant. You might also have a debt collector who is also on your case and constantly following up on the progress of your payments. It can be draining to receive constant emails or calls from your debt collector yet you are already trying your best to clear the credit card debt. So, how can you negotiate with a debt collector so as to be relieved from such situations?

You’ll have the option to use a company to get you payday loan relief, or if you prefer DIY then here’s how to do it:

The important thing in such situations is working on improving your credit score. You could do this by negotiating with your debt collector and have them report your debts in a certain way. This will enable you to have a credit report that does not have negative information. Therefore, you will be in good standing when a potential creditor views your credit report in the future.

The other option that you have is to offer to make monthly payments. However, before doing so, the debt collector may have you fill out a statement, declaring your income, expenses and assets. Ensure that you give out information that is true because false information may do more harm to your case, if you are signing the papers under the penalty of perjury. Also, you may give information that may work against you, so be cautious of what information you will provide. You should ensure that the monthly payment does not strain your finances and you will be able to cater for your other expenses and bills comfortably. Ensure that you have written agreements with your debt collector after you are done with the negotiations.

If you can afford to make a lump sum payment, you may negotiate for this with your debt collector. You have to set a

Lump Sum Payment

Lump Sum Payment

specific amount that you are willing and able to buy and stick with it. Do not agree to pay a lump sum that amounts to more than what you are able to pay off at that time. This is because a debt collector may assume that since you are willing to pay a lump sum amount, you are able to pay off the debt with an amount higher than that which you have suggested. Most creditors will settle for half the amount that you owe them, whereas others may want 70% to 80% of the amount owed. In cases where the debt collector thinks that the chances of you repaying the debt are minimal, they may settle for a third of the amount owed or less.

Negotiating with a debt collector is beneficial for you and the creditor. This is because you will be able to settle the debt with less pressure and they will achieve their objective of maximizing their returns. The debt collector will be pleased if you are willing to pay back a percentage of the amount owed. However, you need to consider your financial situation and not promise what you cannot deliver. This avoids the vicious cycle being continued as you may get from one debt to another. Be realistic when negotiating with your debt collector and you may just turn around your financial situation for the better.

Myths about credit card debt settlement

There are various myths that surround credit card debt settlement. A debtor may not tell apart the truth from these myths that are often told. The following are some of the myths associated with getting out of debt and the truth about credit card debt settlement:

You Need to pay someone so as to get yourself out of debt

You Need to pay someone so as to get yourself out of debt

Myth 1: You need to pay someone so as to get yourself out of debt.
Fact:
This is not often necessary in some instances. There is an increase in the number of debt settlement companies that are scams. Do yourself a favor and avoid losing more money to such scams. The situation is only well understood by you and you can negotiate the debt settlement terms for yourself. A debtor will put in more effort to get out of debt than one who is hired to do this. However, it is agreed that in some instances, it will be advantageous to have a negotiator or a payday loan debt settlement company.

Myth 2: An individual’s credit score will not be hurt by credit card debt settlement
Fact:
Settlement of debt, just like bankruptcy can affect your credit score. Although debt settlements and defaults may not influence your credit score if they are not reported, this is just a temporary situation. The truth of the matter is that debt settlements are normally reported, eventually.

Any individual with a good reason can get their credit card balance slashed into half

Any individual with a good reason can get their credit card balance slashed into half

Myth 3: Any individual with a good reason can get their credit card balance slashed into half
Fact:
There are underwriting criteria that are looked into so as to enable a debtor to have his or her credit card balance halved. Debt settlement companies and creditors will conduct a thorough screening to prove that one is experiencing the hardship that meets the underwriting criteria. A debtor experiencing hardships such as a divorce, temporary job loss and medical problems may get debt settlement.

Myth 4:  The debt will stay forever if I do not settle it
Fact:  
There are statutes of limitation in each state that limit the duration in which debt collectors may file lawsuits over credit card debts that are yet to be paid. Therefore, if a debtor has an unpaid amount over a number of years on a charge account, such a debt is not legally enforceable. This is because at such a point, the payment to be made will be considered voluntary and not in a debtor’s interest as negates the argument of the credit card debt collection limitation.

Myth 5: Filing for bankruptcy or getting debt settlement are my only options when I am unable to pay the credit card debt.
Fact:
These are options that are extreme, which may lower your credit score and you have other options such as getting forbearance. This is a situation whereby you may still be charged an interest on your loan, but you will be allowed to make payments in smaller amounts or to make no payment at all. Instances such as a job loss are considered for forbearance.

These are just some of the myths about credit card debt explained. However, if you find it challenging to settle your debt, do consider managing your finances well and be well informed on the options available to you.