Options for Dealing with Debt in Colorado
Table of Contents
The 4 Options for Dealing with Debt, a Few Warnings and the Insider View on Attorneys
When you have been up until 2:00 a.m. worrying about how you’re going to pay your debt, it’s hard to get a clear perspective on your best option. If you were in my law office, I would run calculations with you as to each option. Short of knowing your individual situation, I can offer you some basics that might help you figure out your best plan. And I’d like to help you avoid making things worse.
Here are the only 4 Options I know of to deal with debt:
If you can’t pay your debts in full and you have a lump sum to operate with, you can cut deals with creditors. Whether this will be successful depends on the number of creditors, the amount of debt and how much money you have to work with. If you have just a few creditors, this is the ideal solution. However, you must be sure to get a statement in writing from the creditors that confirms the debt has been satisfied, how much you are paying, that they are notifying the credit reporting agencies that the debt is resolved and you need to deal with the tax issue. If you can, you should get the creditor to agree that the debt is the amount of settlement because otherwise, they will send a notice to the IRS that will cause you to be taxed for the difference between the debt owed and your payment. (This is because the law says that if they forgive you some of the debt, it is a type of income to you that is taxable). Smaller creditors and some represented by firms will do this for you but many of the credit card companies won’t. This may or may not create a serious tax problem at the end of the year so don’t make any deals until you figure that out. Do not accept any verbal deals, as you will have no recourse if they pursue the rest of the money later or they sell the debt and a successor creditor comes after you. Be certain to save the letters confirming any deals for at least five years since you may need to prove that the debt is resolved.
If you have a number of creditors and very little money to bargain with you will be wasting your time calling to resolve the debt if you are trying to lower the overall debt. Creditors want cash, not payment plans, and they tend to want a hefty percentage of what is owed. However, you can still use this strategy by being strategic and paying small debts in full, while negotiating a monthly payment on the full amount of larger debts and insisting on no interest or penalties accruing as you pay. Get any deals in writing, since you might otherwise pay a creditor for six months and still get sued and charged with penalties and interest.
You are probably eligible for some type of bankruptcy relief if you can’t pay your debts. You only want to pursue this option if you can’t dig out due to the amount of debt and your income. A good rule of thumb is that if you are not able to make all your debt payments some months or if you are barely able to pay and can’t afford essentials, then you need to look at this option. Particularly if even a payment plan would not relieve you of your debt for more than three years (and your plan must leave room for essentials and unforeseen problems on your end).
If you are considering bankruptcy, then you need to consider whether Chapter 7 13, or 11 is appropriate (this article doesn’t deal with options related to farms). Chapter 7 wipes out most debt and is an attractive option because it is a 90-day process, at the end of which time you have relief from most debt. However, you can’t get rid of most maintenance, child support, taxes or student loans (there are exceptions but don’t count on it). In order to qualify, you can’t have filed a Chapter 7 in the last eight years and you need to meet the income guidelines or the expense guidelines. The income guidelines route is the easiest; if your household income falls within the guidelines based on number of people in your household and their income, you’re in. You can look this up on a chart available on the federal site for bankruptcy in Colorado. If you make too much money, you need to look at your expenses, but that is trickier and I suggest you consult with an attorney to determine if it is possible. For that matter, if your income appears to be too high, you should still consult with an attorney since there are some peculiarities that might mean you are still eligible.
Chapter 7 is for you if your income is not too high and you don’t have assets beyond the Chapter 7 exemptions. There are exemptions for items like houses, cars, personal property, tools, etc. If you have a house, you can have a certain amount of equity in it that you get to keep, but over that amount, you keep the homestead amount of equity and they sell your house and give the rest of the equity to your creditors. How to value these items is an important point since you do not want to overvalue or undervalue the asset. Chapter 7 is my preferred option among the various types of bankruptcies because you are closing out the debt permanently and can get a new start.
Chapter 13 is an option for those who make too much money or who can’t do a Chapter 7 without losing significant assets. For example, if your assets are larger than the exemptions allowed for your house (the homestead exemption), car, household goods, etc., you could lose a substantial sum of money if you did a Chapter 7. And in some cases, even if you wouldn’t lose assets, the problem is you don’t fit within Chapter 7 requirements because you earn too much money to qualify. Chapter 13 reorganizes debt by creating a plan with creditors; they are paid for a period of 3-5 years and they can’t sue you. You get discharge of any remaining debt at the end of the plan. There’s just one little problem – most of these plans fail. The reason for this is that the trustee won’t accept a plan unless it gives the maximum amount of your income to the creditors. That means if your transmission blows there is no money in the budget to fix it. Which results in you calling your bankruptcy attorney and paying them to file you in a Chapter 7 (which is often possible at that point). Only do this if you make too much money, or if you would lose too much assets and you have to have protection from creditors. And brace yourself for several very difficult years. But at least they can’t garnish, repossess and foreclose on you if you have Chapter 13 protection. However, if you have this many assets or income, there might be a better deal possible through negotiation than this bankruptcy option. And do not file a Chapter 13 because you think it looks better for your credit rating than a 7; creditors treat the two types of bankruptcy precisely the same.
Chapter 11 is for businesses and applies to debt that is in the business’ name only rather than personally secured by you. It can be a useful mechanism if your financial problems are related only to your business but it is fairly expensive and takes awhile.
For any of these options, it is best to consult with an attorney to determine if you are eligible, whether bankruptcy is the best option and if there are any problems that you need to deal with prior to filing. Some attorneys offer free consults but be sure to ask in advance of the appointment so that you will know if you have a financial obligation for the consult and what information to bring to the appointment. (Typically, you need to know your income for the last two years, monthly income for the last six months, total amount of debt as well as the amount of consumer debt and other types of debt, and at least an estimate as to the value of the assets you have).
Occasionally, most of the debt is due to fraud. If you suspect some of your debt is due to fraud, talk with a consumer law attorney or the Colorado Attorney General’s Fraud unit as to whether you have recourse that would make a bad debt go away before you consider negotiating with creditors or filing for bankruptcy. Examples include: identity theft, or a car or house purchases where there has been fraud. It is worth the attempt of informing creditors that you are the victim of identity theft, if this occurs. It will require you to make a painstaking effort with all calls noted as to who you spoke to, when, and what they said or correspondence that you have kept copies of so you can keep track of what progress you are making in convincing creditors that you did not accrue the debt. If you happen to know or can guess who might have taken your identity, you should certainly try working with the police. However, if you can’t get these items off your credit report and creditors are hounding you, there is the last alternative of filing bankruptcy. If your debt results from a bad commercial transaction, consider if you have any written documentation that would show fraud (that you have been lied to about any aspect of the transaction). If you don’t have anything in writing, sometimes a witness would work. Talk with an attorney about your options since you might be able to rid yourself of a sizeable debt.
This is a polite way of saying you won’t pay the debts. This works if creditors can’t take your income (such as if you are on Social Security Disability) and you don’t have assets or they aren’t worth pursuing (no house, no car worth repossessing, etc.). Under this option, you weigh the frustration of calls, letters and risks posed by lawsuits against the costs of a Chapter 7. If you choose this option, you could have caller id and not answer unknown callers, toss the letters and mostly ignore the lawsuits if you are confident they can’t actually take anything from you (see my warning section). However, there are a few downsides. The first is that creditors will continue to pursue you for some time, which means that beyond collection efforts, you will be looking over your shoulder. And if your economic situation improves, you will be at risk since there will be something for Creditors to seize. Additionally, most people feel uncomfortable with having obligations that they have not resolved. If you nevertheless choose this option, one important warning: You note I didn’t say completely ignore the lawsuits. Please see the warning section, which applies to all debtors but particularly ones considering this option. In summary, the upside of this option is that you don’t pay the debt and you don’t need to pay for a bankruptcy. The downside is the harassment by creditors and the potential they will find a way to get you. Example: You are on disability but they garnish your account anyway; now you need to go to the creditor and possibly the Court to get the garnishment lifted since it was improper.
Options for People with Student Loan Debt
Our firm gets a constant stream of calls from people overwhelmed with debt and particularly, student loan debt. I’ve talked to a lot of desperate people and checked into every option available. This is what I’ve found:
The first step is to find out as much information on your loans as possible. Why? Because that information will tell you which options will work best for your type of loan and who is holding them. Call Loan Locator 1-800-433-3243 (this is a federal Dept. of Education number). Put in your social security number and they will tell you what your loan status is and who has your loans. If they find several loans with different servicers, you might want to consider consolidation as one of your options. If some of your loans have slid into default and are now with collections you might want to consider Rehabilitation. If they haven’t heard of your loan, you might have a private loan, which can be very good or very bad.
Let’s start with federally guaranteed student loans first, since many people have them. If you have one or several that are catastrophically high it’s usually a serious problem for you and quite difficult to bankrupt out. There are some options that are helpful. Under recent rules instituted by President Obama, many borrowers can take advantage of two helpful options.
The first option is consolidation; which means that instead of trying to pay different sources, there is a new loan and all the old ones go away. It also means that you are in the Income Based Repayment program (IBR), which means one payment per month, the payment is based on your actual income, and you have an extended repayment period. This option isn’t practical if you are in default.
The second option is good for default and is call Rehabilitation. Your loan gets rehabilitated through making nine (9) ‘reasonable and affordable’ payments that will be tied to your income. This is a change since it used to be the nine payments were not reasonable or affordable since the collection agencies didn’t make good money that way. However, the President noted that collection agencies commissions were tied to higher payments, which were disastrous for borrowers. So he reduced collection agency commissions to eliminate that problem (meaning they don’t make money by insisting on higher payments). I mention this because you may have heard of the problems that happened earlier and thought this program won’t work; however it’s gotten much better. Once you are out of default, you are put on a long-term payment program that is tied to your actual income and can’t be more than 10% of your discretionary income. This program also rehabs your credit rating because it removes negative comments so your credit score goes up.
Read all Court Correspondence: Once someone sues you (you have been served by a process server or you find legal documents on your front step), it is critical that you read the pleadings (documents sent to the Court by the Creditor and Orders from the Court) as well as letters from attorneys. If you don’t, you will likely be cited for contempt, which would allow them to jail you. How can you be jailed for a debt? You aren’t being jailed for a debt. You’re being jailed because the Creditor’s attorney asked you to answer questions (called Discovery) that you failed to answer. Some people don’t answer because they tossed the papers without reading them. Others don’t answer because they don’t want to provide information such as their bank, account numbers, etc. However, if you don’t answer the Creditor will file a Motion to Compel, which the Court will grant. If you still don’t answer, they will then file a Contempt Motion. Contempt motions are the way that attorneys and judges have of making people take the justice system seriously. If there weren’t serious penalties for ignoring court documents, the system would quickly fall apart. So if you don’t answer the Contempt Motion, the Court will rule in favor of the Creditor, and a bench warrant will be issued. This means that you will be picked up by the cops and will usually spend the night in jail. Creditor’s counsel will be glad to agree to resolve the contempt so that you can be released if you agree to pay them what they want, otherwise you have to wait for a hearing before the judge. At that hearing, the judge will determine if you are in contempt (you are) and what to do with you; that can include more jail time or monetary sanctions.
How do you deal with this problem? Fight the lawsuit by answering it, or at least answer the discovery or file a bankruptcy to deal with the debt. If there is really nothing they can take anyway or garnish then answering the discovery may not give them much. If they can garnish wages or take your property, you will likely need to file for bankruptcy protection so that the creditors cannot harm you through garnishment, repossession of your car or other items bought on installments, or foreclosure of your home. It is better to file before they are actively garnishing, etc. because it will be less expensive and there is less danger that your attorney can’t recover your money or property. For example, some garnished money can be retrieved and some cannot.
Keep all dealings with Creditors in writing and keep careful notes: Please don’t think that Creditors are a good risk for verbal deals. If you made a deal on the phone to pay $50.00 per month on your Visa, the person who made that deal is now gone and their successor doesn’t know anything about it. So, they refer the case to collections or sell the debt to a new agency. All deals have to be in writing so you have recourse if they come after you for more payment. Also, it’s hard to make any progress on a debt issue unless you know whom you spoke with, when, what was discussed and precisely what you are supposed to pay and the date of payment. (I’ve seen cases where the person paid the agreed upon monthly amount but the Creditor alleges they paid the amount late and sued them for the entire original amount, plus late fees, penalties, interest and attorneys fees).
Never, Ever Take Advice from People in Bars, Well-meaning Relatives, Form Sellers, etc. I have heard some extremely pitiful stories from clients of advice they took that got them in serious trouble because the advice giver really didn’t understand the law. Example: Sell your car, take the proceeds, buy a new car and put it in your Mom’s name then file a Chapter 7 (given by an Ex-Husband!). Guess what! That’s a fraudulent conveyance and a great way to set yourself up for a felony in bankruptcy court as well as have your case thrown out. The current Bankruptcy Reform Act was written by banks and credit card companies and is not debtor-friendly. There are lots of requirements and rules to trip over. The last thing you need is someone with no bankruptcy law experience getting you in more trouble. And that includes those geniuses that sell forms at ridiculous prices. They are forbidden to give legal advice but usually sneak in a few completely wrong bits of advice. So in addition to overcharging you for forms you could have gotten at court or at a court website cheaper or free, they’ve also screwed up your case. Bankruptcy law is tricky enough that you need someone with actual legal knowledge to advise you as to your particular situation. You’re better off paying some attorney for a consult (most do charge for a consult, some do not) than to get advice that will get you jailed or thrown out of bankruptcy court.
Watch out for Consumer Counseling Services: Guess who pays a large portion of the operating expenses for most consumer counseling services? Why yes, it is credit card companies. It should not be a surprise to you that they recommend you not file a bankruptcy and that you should pay large amounts of money to them to resolve your debt. There is another problem. They will not work on your case until you pay them their entire fee. If you’ve paid part of it, they do not start calling creditors. And you need to take a hard look at their debt payment plan. Can you really pay them their fees plus the debt payment they recommend? Is there any room for necessities plus unforeseen expenses like your kid getting sick or hurt? If not, save your money for an attorney and resolve the debt permanently rather than spend a few nerve-wracking months paying large amounts of money and still fail.
Retirement Money, Equity and Debt: Before you take out a second on your house to pay debt or liquidate your retirement you need to carefully run some calculations. At least some of your equity and most retirement accounts are protected in bankruptcy. It would be a shame to lose these accounts and still wind up with a bankruptcy because you still have too much debt or your financial crisis isn’t over. If you’re not sure, consult with an attorney.
If you think you might want to file Bankruptcy, DO NOT: 1) transfer, sell or otherwise convey any property to preserve it. (This is called a fraudulent conveyance, and has criminal sanctions and will likely get your case dismissed). 2) Do not use your credit cards unless you absolutely have to for necessities and you can make some sort of payment on those cards; particularly avoid cash advances and using their checks. (Considered a fraud if done 90 days before bankruptcy on the basis that you must have known you might need to file and that you couldn’t pay). 3) Do not try to repay anyone more than $600.00 because you’re afraid you might have to file (Called Preferred Creditor and forbidden since you cannot treat some creditors better than others).
Do’s and Don’ts with Attorneys: You really do need to tell them the whole story despite advice you will get that you shouldn’t tell them things you wouldn’t want the court to know or that you find embarrassing. Otherwise, you might be sitting in a hearing when it comes out and your attorney will have very little opportunity to dig you out of the problem. Or they might give you advice that isn’t helpful since they don’t understand your situation. At least give them a shot at resolving the issues. Don’t call them at the last minute either. If you think you have a serious problem, get some advice before you’re asking them to deal with a train wreck occurring tomorrow. It will cost you a lot less, it is more likely they can fit you in and they will have time to be prepared. Another reason to do a consult is that beyond what I’ve covered in this article, there is a considerable amount of information specific to individuals that might apply to you as well as specific concerns you might have that a good attorney can address.
Legal Fees: If you are concerned about the cost of the fee and whether your attorney is any good, I would suggest that you call around to see what the varying fees are in your area (most of the time, it is a flat fee which is a one-time fee rather than an hourly or a contingency fee). If they charge very little they will spend about that much time knowing you or your case. And you should ask if they’re doing ‘unbundling’ of legal services. This means that for what you pay them, they only do part of the case. The fee agreement should tell you but you want to be sure they are going to do the paperwork, file the paperwork, deal with the creditors for you and go to the hearing with you. If they plan to skip any of these steps, the fee is cheap but not worth it since you need to have the bankruptcy succeed. If they charge a lot compared to other attorneys you are being overcharged or you have a tricky case (you will probably know if you do but that includes lots of assets, income or other red flags) or possibly that they are God’s Gift to the Law. You do not need God’s Gift to the Law unless you have a tricky case or you greatly admire the legal profession.
How to Pay for Legal Counsel: Most debtors recognize the benefit of having an attorney to file bankruptcy but think they can’t afford it. The way most debtors pay for legal counsel is to stop paying the debts they can bankrupt and use the money for the retainer. For those filing a Chapter 7, another option is to have a friend or relative assist you on the basis that once your debts are discharged, you’ll be able to pay them back. Although most debts are discharged in a Chapter 7, you can pay any debts you choose to pay after the bankruptcy is over.
Good Attorneys vs. Bad Attorneys: The bad ones will treat you with contempt, spend very little time with you and do not seem to know what is going on with your case. They will not answer your calls or deal with creditors. They may not show up for the hearing either (Check the fee agreement!) The good ones will be straight with you as to whether you have problems in your case, what you need to do to have a successful case and they are usually nags. Also, take a good luck at your attorneys’ support staff. Are these people nervous and unhappy? If so, run away. If they seem courteous, reasonably calm and moderately cheerful it is probably a good law office.
One final note: If you need additional information, check my website at juliekreutzerlaw.com and read through other attorneys’ websites. I would avoid the websites that are generic since they usually don’t provide much content.