Settling Your Debts Instead of Filing Bankruptcy

A bankruptcy can be a quick, clean, and cheap way to deal with unmanageable debts. However, as I’ve mentioned in prior blog posts, sometimes a high income earner will find himself or herself stuck in a situation where he or she cannot qualify for a Chapter 7, but cannot afford a Chapter 13.

Where the problem debts are mostly unsecured, another option in this kind of case is to hire an attorney to conduct debt-settlement work. While each individual creditor is unique, the large banks and credit card providers typically have many departments that handle collections. Your credit card debt starts life in the customer service or billing department, for example, and moves on to a delinquent department after you miss a few payments, then on to collections if payment still is not made. Eventually, the debt is referred to an attorney who files a lawsuit against you.

Sophisticated creditors understand that they cannot violate a bankruptcy stay – the injunction that stops anyone from collecting against you while you are in bankruptcy – and so typically have special bankruptcy departments or a bankruptcy flag they can attach to an account. In this case, when an attorney announces that you are planning for bankruptcy, many employees are trained to simply refer the matter to that department.

Once there, your attorney can be a very strong position to settle your debt. The bankruptcy department of your bank probably understands that this is their last chance to get anything out of you, because they may get nothing in a bankruptcy. I have helped clients settle their debts for pennies on the dollar at this stage. This may prevent you from having to file bankruptcy at all.

There are many non-attorney businesses that advertise these kinds of debt settlement work, often for less than you would pay an attorney. Be aware, however, that not all of these businesses are created equal. Some will do little more than help you save money towards paying the debts, and charge you a great deal for that service. Even companies that work actively to settle your debts are not as effective as a law firm, for the simple fact that an attorney can credibly threaten to file a bankruptcy, resist court actions to enforce a collection, and otherwise actively protect the client.

This post does not contain legal advice. If you need legal advice, please contact us to set up a consultation.