Debt Negotiation

There must be a lot of money to be made in debt negotiation. Just listen to all the advertising. Do you think they are out there for your benefit? They are trying to make money off you. It has gotten so bad that Attorney General's throughout the country are shutting the worst offenders down.

Here is my perception of how they work. First, your creditors will not negotiate with you when you are current with your payments. So, you must start missing payments. The reality is, you have to miss about six payments before you can get to someone with authority to settle the case. While you have missed six payments, late fees and interest accumulate. Thus, your debt becomes higher.

If you are using a debt negotiation company, they will likely charge you a monthly fee. At the same time you will start to put money away. After six months, when creditors are starting to talk to you, or the negotiator, a lump sum settlement amount will be negotiated. While it may seem like 50% of the amount owed, in reality it is probably closer to 75% or 80% of what it was 6 months earlier considering the new late fees and interest that has accumulated. And, you have ruined your credit.

A better approach may be to make minimum payments on certain debts each month while dedicating extra money to the lesser of your credit cards. Eventually, you will pay off that creditor. When that creditor is paid off, you move on to the next creditor until you are debt free.

Of course, this is much easier said than done, and takes a lot of discipline. But, the reward is worth the sacrifice.

What About My Credit Score?

It seems that many Americans are more concerned with their credit score than their net worth. I have many clients that have $50,000 or more in credit card bills that are more worried about how bankruptcy will affect their credit score than they are with getting rid of the debt. Each month they are paying $1,000.00 per month or more to pay off credit cards. They are killing themselves with worry and stress to pay this debt. They aren't working for retirement or a financial future but instead are working to pay debts.

As I have stated before, I think bankruptcy should be a last resort. There should be a plan to get out of debt before resorting to bankruptcy. But, if it is impossible to pay off the debt due to income limitations or illness, bankruptcy is a very good financial option. It is certainly better than being a slave to your debt.

How will bankruptcy affect your credit score? It will affect it between 100 and 200 points. Now, we've got that out of the way, what does it mean? Bankruptcy stays on your credit report for 7-10 years. However, once you obtain your discharge in bankruptcy, you can begin to rebuild your credit.

As you make each car payment and each mortgage payment, you are rebuilding your score. When looking at your credit score, examiners will see higher income and low debt levels (debt to income ratio) because you have just discharged your debt in bankruptcy.

While rebuilding your credit score will take time, rebuilding your life will be easier.

BEWARE OF TRANSFER OF PROPERTY

I always thought this was an obvious point, but after having many clients ask me, "what if I give the property to my (insert family member)", I think this issue should be addressed.

When one files bankruptcy, they have a duty to disclose their entire financial picture, including any transfers they have made over the past two years. The failure to knowingly list a transfer may result in the denial of the debtor's discharge, meaning that there was no reason to file bankruptcy. Or worse, the Debtor could be subject to criminal prosecution for bankruptcy fraud.

Sometimes a potential client may have an asset that is not subject to being exempt (that is, untouchable by the trustee). Sometimes it is a car. After going through the scenario of either losing the car in a chapter 7 or paying for the car in a chapter 13, I often get the question, "what if I transfer the car to my brother?" One is free to make the transfer, but the transfer must be disclosed in the bankruptcy.

If the transfer was done without consideration, that is, the person who the property was transferred to gave nothing in return, the bankruptcy trustee can recover the property. The bankruptcy laws give a lot of authority to the trustee. The trustee in a bankruptcy case has a duty to investigate a debtor's financial affairs. Within that investigation is the examination of any transfers from the debtor to anyone else. The Trustee can apply the law of the state and look back four years in Florida.

Even if the transfer was done with no intent to hide the asset and was given as a repayment of a debt, the Trustee could still seek recovery of the asset. Transfers to family members within one year of the filing of the bankruptcy, even if it is for the repayment of a debt, can be avoided by the Trustee as a "preference".

The rationale for these recoveries is to put all creditors on equal footing. The court does not distinguish American Express from Aunt Millie.

HOME LOAN MODIFICATIONS

Maybe as a result of the market, or because of the bailout, there has been a lot of success with loan modifications. Some banks are more willing to work with you than others. You have to be patient with the results. In what seems like a good gesture on their part, the bank may initially allow you to miss a few payments if you come up with a significant down payment towards your past due amount. This will not be the best offer the bank can make. Nor will it likely be in your best interest to take what they offer.

There are various companies offering to assist with the modification. Some of these companies have good success. Others really do not do much for you. If you are going to try to do a loan modification, make sure you use a reputable company.

When seeking to modify, you will need to provide:

hardship letter
tax returns for 2008 and 2007
a month of paystubs
bank statements
original loan closing statements
list of income and expenses

Modification should be an option that you should examine thoroughly. It could lead to a good result for you.