I spoke with a person today who was being sued by two creditors for unsecured debts. It is interesting to note that when the person called-in they only listed one lawsuit they wanted to talk about. However, my staff found a second lawsuit in the same county where they had not yet been served. The prospective client was interested in retaining our firm to negotiate a settlement to these lawsuits. Here is what he thought he was looking at:
Amount owed (lawsuit 1) = $2,475.00
Amount owed (lawsuit 2) = $5,700.00
First, let's address the problem with debt settlement strategies for consumers. While negotiating outstanding debts with unsecured creditors (credit card companies) may be a good way for certain qualifying people to shed debt, it becomes much more difficult once the creditor had filed a lawsuit. Once the creditor has filed a lawsuit there are now lawyers involved which always makes things more difficult for consumers. Often times creditors may be willing to take anywhere from 30%-50% lump sum payments to resolve debt that is more than 90 days in default, but once the lawsuit is filed your options shrink. The creditor's lawyers will either negotiate a payment plan that pays off 100% of the debt or, if they are willing to negotiate partial payoffs, they will require one-time, lump sum payments.
A negotiated settlement in the above fact pattern would've looked something like this:
Lawsuit 1 = $100/month for 24 months or $2,000 lump-sum payment
Lawsuit 2 = $150/month for 38 months or $5,000 lump-sum payment
Either of these scenarios was not good for this particular person and is typically not good for any consumer. People simply cannot afford to sustain $250/month payments for 2-3 years. That presents a huge hole in their budget. Moreover, a $7,000 combine lump sum payment would be impossible for most. Think about it, a person that could afford up to $250/month for 3 years or to lay down $7,000 in one payment wouldn't be in default on their credit card payments.
This scenario presents more problems because the person couldn't afford either scenario, but the amount in question is typically not enough for us to seriously consider bankruptcy options. So, as usual our firm was thorough and asked this person to pull their credit report and let us review. They did. We reviewed. Here is what we found:
1. Amount owed (credit card - charged off) = $2,475.00
2. Amount owed (credit card - charged off) = $5,700.00
3. Amount owed (credit card - charged off) = $4,500.00
4. Amount owed (retail credit card - charged off) = $1,800.00
5. Amount owed (retail credit card - charged off) = $2,250.00
6. Amount owed (bank line of credit - collections) = $2,200.00
7. Amount owed (bank line of credit - collections) = $1,600.00
Total debt = $20,525.00
Keep in mind that "charged off" doesn't mean that you still don't owe the debt or that the creditor won't collect from you. But that is a discussion for another day. Their initial consultation was prompted by their desire to pay off their debts. However, once we looked at the big picture it became clear this would be a very costly exercise that had little chance of success. Many lawyers would have taken their money and negotiated settlements for the original two debts without regard for the fact that it would've been a major financial disaster for the client.
With more than $20,000 of known debt it was now clear that this person needed to go through a bankruptcy analysis. Now let's look at some other relevant factors to determine whether or not bankruptcy is right for them.
We start with looking at a Chapter 7 Bankruptcy because this person wasn't interested in saving a home or catching up a car payment. This is about getting rid of the debt. Here is the relevant information we found:
1. Monthly household income = $2,816.66 (gross)
2. Household makeup = single person, no kids
3. Home status = homeowner with current mortgage
4. Owns car with no payment due to bank. Blue book value (approximate) between $900 - $1,500
5. No savings
6. No other assets of besides normal personal property
Their gross annual pay comes in at under $34,000 and their only asset is a car of very limited value. It is now clear that Chapter 7 Bankruptcy is the only path to go. Chapter 7 bankruptcy presents a great value to rid this person of their debt for a number of reasons, such as:
1. All debt is liquidated for a flat rate payment in legal fees and the court filing fee (less than $1,900). This means that this person could eliminate all of their unsecured debt in a Chapter 7 Bankruptcy for less than 9% of their total debt, or they only have to pay 9 cents on every dollar they owe to wipe out all their debt.
2. Once the bankruptcy is filed, the lawsuits stop and eventually become moot and will likely be dismissed.
3. All collection activity immediately stops upon filing the Chapter 7 Bankruptcy.
4. The entire Chapter 7 Bankruptcy process takes about 6 months from the date it is filed to the date of the final discharge.
5. Our firm prepares and files all Chapter 7 Bankruptcy cases within 30 days of the date we are retained.
6. Once the person receives their Chapter 7 Bankruptcy discharge their credit reports will be updated to report $0 money due / $0 balance for the previously referenced charged-off and collections accounts.
While this person didn't call in to discuss Chapter 7 Bankruptcy and really didn't want to consider it, it became apparent to them that Chapter 7 Bankruptcy was the correct move to become debt free essentially overnight. Compare the value of a Chapter 7 Bankruptcy vs debt settlement:
1. Chapter 7 Bankruptcy (in this case) = costs less than $1,900 to eliminate $20,525 worth of debt and to move those balances off credit reports.
2. Debt Settlement = approximately $13,175 (lump sum settlement of two lawsuits + 50% negotiated settlements of balance of debt).
3. Bankruptcy = less than .05% of annual income vs. Debt Settlement = 40% of annual income.
The moral of the story is to speak to a lawyer and law firm that understands the bigger picture and has the knowledge and know how to help you figure out the best options for your particular situation. Most consumer lawyers will just take the money the prospective client is offering and not sit down and help them figure out their best path forward. The other idea to consider is that Chapter 7 Bankruptcy presents significant savings to most Florida consumers that make an average salary and do not outright own their cars. So many people think that Chapter 7 Bankruptcy is a bad option because there is so much negative news associated with a Chapter 7 Bankruptcy. We will dive into some of the negative connotations commonly associated with a Chapter 7 Bankruptcy in another post, but it is obvious that the negative misinformation spread about bankruptcy comes from banks and creditor corporations. When you look at the results achieved in this scenario, only paying .05% of your income to rid yourself of $20,000 of debt, you can see why banks and creditor corporations are against Chapter 7 Bankruptcy. In many situations a Chapter 7 Bankruptcy is the most powerful and most cost-effective way for consumers to pull themselves out of debt almost overnight.
