Arizona Bankruptcy Lawyer Blog

Some debts will be discharged in a chapter 7 bankruptcy case UNLESS the creditor files a complaint and obtains a court order that the debtor will remain responsible for the debt after the case is over.

The debts that are not dischargable if the creditor successfully challenges discharge are typically:

1. Debts that arise as a result of a fraudulent action. This includes:

a. Debts that are the result of an intentionally fraudulent act in which the creditor relied on the deceit in it's extension of credit. Examples:

- Debtor obtained the loan and promised to pay back when had no intention to do so (this is common i.e. borrowing money against a line of credit or credit card when the debtor knows they are insolvent and unable to pay and/or is going to file for bankruptcy)
- Debtor borrowed an item and used it as collateral for a loan
- Debtor wrote a check for an item, stopped payment on the check and kept the item
- Debtor wrote a check when funds in the account were insufficient then promised the seller
the check was good

b. Recent credit card charges that were used to buy luxury items.

- The law presumes...that a debt is fraudulent if it was more than 550.00 from any particular creditor for a luxury good or service within 90 days prior to filing the bankruptcy

c. Debts incurred based on a false written document about financial condition. Requirements:

- The statement must be in writing obviously.
- It must have been "material" i.e. a very important factor in the creditors decision to extend
credit. (overstatement of income is a common material false statement)
- The false statement must relate to financial condition
- There must have been an intent to deceive the creditor
- The creditor must have reasonably relied on the statement

Continue reading "Debts not discharged in a chapter 7 bankruptcy if the creditor objects" »

In a chapter 7 bankruptcy the debtor is able to "discharge" or cancel the obligation to pay certain debts. These debts typically include:

credit card
medical bill
personal loan
deficiency balances car repossessed
deficiency balances other personal property repossessed
deficiency balances on home foreclosure
certain tax debt
student loans for which the debtor can prove a "hardship"

The real question is, what debt is going to survive the debtor's attempt to discharge in the chapter 7 bankruptcy?

Continue reading "Arizona Chapter 7 Bankruptcy - Which Debts are "discharged"?" »

If someone "co-signs" a contract in order to help a friend or family member get a loan, that co-signer is legally liable to pay the debt and his or her credit report will reflect that.

What if the borrower files for bankruptcy? A few important points:

1. The cosigner is considered a codebtor both inside and outside of bankruptcy.

2. The creditor can legally pursue the codebtor for payment even if a chapter 7 bankruptcy is filed. There is no automatic stay protection for the codebtor in a chapter 7 bankruptcy.

3. The creditor can only pursue a codebtor if the borrower files a chapter 13 bankruptcy case in certain circumstances, as follows:

a. The case is over and the debt wasn't paid in full during the plan.
b. The codebtor is the one who received the consideration for loan i.e. actually owns the car.
c. The loan isn't being paid back during the plan.
d. The creditor can convince the Judge that it's interests will be "irreparably harmed" by continuation of the codebtor stay.
e. If the debt arose in the ordinary course of business and is not a consumer debt.

If you are considering bankruptcy and have a codebtor, you should speak to your attorney about the effect the bankruptcy filing will have both on the codebtor's credit and requirement to pay the debt.

Amounts paid on certain debts secured by assets can be reduced in a chapter 13 bankruptcy. The most common are:

1. Car loans entered into more than 910 days prior to the filing of a chapter 13 bankruptcy.

2. Second mortgages on homes where the home value is less then the debt owed on the first mortgage.

A reduction or "cram down" as it is commonly known is not available to reduce the following loans in a chapter 13:

1. First Mortgages

2. If the creditor has a "purchase money security interest" in the property (money lent to buy the property in question:

a. loans for motor vehicles that were purchased for personal use within about 2.5 years of the filing date.

b. loans for any other property purchased within 1 year of the filing date.

For these items, the full amount of the debt has to be paid to the creditor through the plan in order to keep the property.

If a car was purchased more than 910 days prior to the date a chapter 13 bankruptcy case is filed and the car is worth less then what the bank is owed, the debtor should be able to change the amount it pays the creditor on the car in the chapter 13 case as follows:

1. Instead of paying the full loan amount, the debtor can pay the bank the value of the car over the length of the chapter 13 plan.

2. Instead of paying the original interest rate, the debtor can pay the bank the "prime plus rate" or the national prime rate plus a specific rate adjustment for risk of non payment. (hovers at around 4.5 to 5.0% now) See Till v. SCS Credit Corp 541 U.S. 465, 124 S. Ct. 1951, 158 L.Ed.2d 787 (2004). (Can the debtor cram down the interest rate on a car purchased within 910 days? topic for another entry)

3. The unsecured portion of the debt is treated as any other unsecured debt and shares in the funds set aside for unsecured creditors, an amount that may be very small.

The ability to file a chapter 13 bankruptcy and thereby change the treatment on a car loan, can be a major benefit to a debtor who has a steady income and an upside down vehicle.

According to Attorney Craig Andresen at bankruptcylawnetwork.com a Pennsylvania District court has ruled that a private employer MAY refuse to hire a job applicant solely because the applicant filed for bankruptcy in the past. See Rea v. Federated Investors, 2010 WL 370334 (W.D.Penn. Jan. 29, 2010)

The Court's language..."while section 525(b) does indeed prevent employers from discriminating against current employees based upon a bankruptcy filing, the unique wording of this section allows bankruptcy discrimination in the hiring process."

You can read Mr. Andresen's article here.

If you have serious debt and feel that bankruptcy may be in your future, be aware of the following:

1. You should avoid borrowing money or withdrawing money from your IRA, 401k or ERISA qualified retirement plans to pay the debt. These funds should be safe in a bankruptcy case.

2. Don't borrow money on your home's equity to pay your bills.

3. If you owe friends, family, or business associates money, don't pay them back within one year before you file (unless less than 600.00). This is considered a "preference" and the money can be recovered form those close to you for distribution to all of your creditors in the bankruptcy case.

4. Don't put property into someone else's name or give an asset away. This type of transfer could be considered fraudulent and cause you to lose the discharge and the asset.

5. If you typically get a large tax refund, think about increasing net income monthly in order to get a smaller refund. It will be property of the bankruptcy estate. If the refund is the result of earned income tax credit, you may be able to request that it be paid in your paycheck.

6. Don't reduce the withholding so much that you end up with a large tax bill either.

7. Continue to make payment on cars and real estate you need to keep.

8. Lastly, get good advice from an experienced bankruptcy attorney sooner rather then later. The longer you wait to get advice, the narrower your choices will be.

Hiring a bankruptcy attorney is a big deal. An incorrect bit of advice can have serious consequences. In my opinion, fees and good sales technique shouldn't be determining factors in making the choice. This is my short list of what should be:

1. How many cases has the attorney personally been responsible for?

2. How many chapter 13 cases has the attorney aided to confirmation?

3. Does the attorney file claims against creditors in consumer cases?

4. Does the attorney litigate, i.e. file motions, appear in Court for hearings etc?

5. How long has the attorney been practicing and practicing consumer bankruptcy law?

6. Does the attorney personally meet with you more than once, personally prepare documents and discuss your options personally after the analysis is complete, or turn most work over to paralegals?

7. Does the attorney or staff "sell" bankruptcy to you or educate you about your options and the pros and cons of each?

8. Is the attorney directly accessible, or do you have to move through "guardians" to reach him or her?

9. Bar Complaints?

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, commonly known as BAPCPA, imposed a "means test" on those filing bankruptcy. This means test primarily determines whether the chapter 7 filing is "presumptively abusive".

In order to determine whether a presumption of abuse exists, the debtor's current monthly disposable income (as determined by the means test itself) is multiplied by 60. If that amount is is equal to or greater than the lesser of $10,000 or 25 percent of the debtor's non priority unsecured debt, the presumption of abuse exists.

Presumptively Abusive doesn't mean that the filer is a bad person...it just means that if the filer were allowed to stay in the chapter 7 bankruptcy and gain a discharge of debt, the law wouldn't be followed.

If the filing fails the means test, the filer will have to convert to or file in the first place a chapter 13 bankruptcy, and pay a specific amount based on a form of the same test to unsecured creditors over what is typically a 5 year period UNLESS the filer is able to successfully rebut the presumption of abuse.

This means test only applies to individuals not businesses, and only if the debt is primarily consumer debt, or debt incurred by the individual for personal, family or household reasons. If the debt is primarily non consumer i.e. for the purpose of earning a profit or involuntary like tax debt, the means test shouldn't apply.

Congress inserted a provision in the bankruptcy code preventing the loss of a job because of a bankruptcy filing. The reasoning appears to be based on a belief that the intended fresh start provided by bankruptcy, wouldn't be complete without job security.

The current version of the code section can be found at 11 U.S.C. sec. 525(b) and partially reads as follows:

"No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt."

The weak spot for employees, especially in "at will" employment states like Az. is that the employer can fire for other reasons including those related to a person's financial history.

If an employee were to sue an employer for a violation of this code section post bankruptcy, he or she would have to prove that the bankruptcy was the sole reason for the firing.

If you think you need to file for bankruptcy, but are concerned about this issue, not only do you need to keep good employment records but you also need to have an experienced attorney help you weigh out all the pros of filing vs all the negative potential consequences including job loss. The choice to file will ultimately be your own.

Most chapter 7 bankruptcy cases filed in the U.S. are considered "no asset" cases. "No asset", is a term lawyers and others involved in the bankruptcy process call chapter 7 cases in which there are no assets available for the chapter 7 trustee to sell and share with creditors either because they are legally "exempt" or just not worth the time.

So a basic question: What does the law protect?

A good place to start is to read a basic list of Arizona bankruptcy exemptions. The U.S. Bankruptcy Court updates a list every so often and has done so as recently as May 2010. Read it here.

Some interesting points about this list:

1. Most major assets Arizona consumers own are exempt in a chapter 7 bankruptcy case.

- Homes - possibly 150000 in equity is exempt (equity =value minus the bank loan)
- Cars - 5000 in equity per person
- Most retirement plan/accounts

Continue reading "Arizona Bankruptcy Exemptions - What are they?" »

It is a crime to hide information about assets from the bankruptcy court. Bankruptcy Fraud is the common term. Read about it at 18 USC 152(3)

The first few lines of this section of U.S. Code read:

A person who—
(1) knowingly and fraudulently conceals from a custodian, trustee, marshal, or other officer of the court charged with the control or custody of property, or, in connection with a case under title 11, from creditors or the United States Trustee, any property belonging to the estate of a debtor;
(2) knowingly and fraudulently makes a false oath or account in or in relation to any case under title 11;
(3) knowingly and fraudulently makes a false declaration, certificate, verification, or statement under penalty of perjury as permitted under section 1746 of title 28, in or in relation to any case under title 11;

the last line reads:

"shall be fined under this title, imprisoned not more than 5 years, or both".

Just a few weeks ago a woman in Idaho was indicted on fraud charges related to a bankruptcy case she had filed in 2005. See Former Mullan Woman Charged with Bankruptcy Fraud

She seems to have attempted to hide a house. I would imagine that a house is hard to hide, although I've never tried.

She obviously hadn't sought some basic legal counsel prior to her decision or simply didn't want to believe the counsel she received.

In my experience, the former is common but the latter problem is as well. Often, a potential bankruptcy filer will whisper "just between you and me", and then proceed to tell me about an item that may have been signed over to an old friend.

Continue reading "Full Disclosure in Bankruptcy is Mandatory" »

A bankruptcy case can be planned and filed by the debtor without the aid of counsel. It happens quite often.

In very simple cases, (some would argue that there isn't such a thing), the debtor sans counsel may escape unscathed, but may do so without really understanding the perils they encountered. Bankruptcy law is full of traps that the average filer and even many attorneys aren't aware of. It isn't just a simple matter of "filling out forms".

Some of the more common and serious problems I see when contacted by a debtor who has filed his or her own case are the following:

Continue reading "4 Common Mistakes When Filing Bankruptcy On Your Own" »

The Bankruptcy Code is made up of eight different sections or "chapters". Almost all bankruptcies are filed under sections commonly known as chapter 7, chapter 11 and chapter 13. Of these three, the chapter 7 bankruptcy is most popular.

In a chapter 7 bankruptcy, non exempt assets are "liquidated" or distributed to creditors based on the order of creditor importance (at least according to congress). A court appointed trustee is appointed to manage the liquidation of this non exempt property and to distribute it to creditors. If no one objects to the discharge of certain debts then the filer is discharged from his or her obligation to pay it.

The main reason that a chapter 7 bankruptcy is popular, is that it is typically quick. A well thought out bankruptcy that is also a "no asset case", i.e. there are no non exempt assets which are worth enough for the trustee to liquidate, is theoretically a 90 day process from filing to discharge.

It is important for a person with serious debt problems to understand that the choice to file for bankruptcy and the choice of bankruptcy chapter are personal. The choice to avoid bankruptcy and try to deal with debt directly is as well.

Except in the simplest of matters, that personal decision should only be made with the guidance of an experienced bankruptcy attorney.

The question is when should these decisions be made, after a short meeting with the attorney or after a more thorough analysis is complete?

I think that many debtors are under the impression that a simple one hour consultation with an attorney (or often non attorney) is enough to allow them to make these decisions.

In fact, many calls to my office start with something like, "I spoke to an attorney (friend, paralegal etc.) and I am ready to file a chapter 7 bankruptcy". My initial thought is usually, "how are you so sure"?

At most, a short consultation can provide the debtor with the sense that bankruptcy may end up being the only option in the long run. It may also provide some detailed information about how bankruptcy works and what problems may be encountered by the debtor.

However, the planning involved to prepare and file a well done bankruptcy case, the final decision as to which chapter makes the most sense, and the verification that there is not some better non bankruptcy alternative, cannot be made without a thorough review of hundreds of facts, timing issues, and potential changes.

This analysis is often made more complicated by the inability of the debtor to provide complete information at the initial consultation and during the analysis process, changes in the debtor's situation, and changes in the law.

I suggest that my clients, even in "simpler situations" hold off on their decision making until a complete review of all their information is complete and a second "analysis" meeting is final.
This way the "stones" are all turned over, before decision making is done.

I find that this creates less surprise and a well planned case.

You should wait as well for your attorney to finalize his or her analysis before setting your heart on a solution. Even if you are "sure" that you are a chapter 7 candidate.

I don't sell bankruptcy as a commodity. Why?

1. There are other options that may better fit the client's situation.
2. The client may have personal reasons for choosing to deal with the debt before relying on bankruptcy.
3. Bankruptcy is not always the best option from a financial standpoint. There are situations where the client will lose more financially in bankruptcy than outside it.

Having said that, I must admit that most of those I meet with, come to the conclusion, after review of their own numbers and how the law works, that bankruptcy makes the most financial sense.

A recent cnn.com article describes a woman with serious credit card debt who has chosen to live on a budget and pay the debt off. No matter her circumstance (she may have more non exempt asset value then debt or simply doesn't qualify well for a bankruptcy from an income and budget standpoint) you have to give her some respect for trying.

If you have serious credit card debt, I am not suggesting that you simply disregard bankruptcy as an option.

I do suggest that you sit down with a sharp pencil and clean paper to look closely at your actual income and budget. If it appears that paying the debt back will be difficult, find an experienced bankruptcy attorney who will personally help you understand your options. Preferably, someone who doesn't sell bankruptcy, but is looking out for your best interests.

The Ninth Circuit Court of Appeals, has decided the issue of whether a reaffirmation agreement is necessary in bankruptcy in relation to personal property.

Prior to the 2005 changes to the bankruptcy code that resulted in what is now known as "bapcpa", a debtor could "retain and pay" or "ride through" on it's car loan as long as he stayed current on the car payment.

The creditor with the security interest in the car was left without any legal obligation to sue on, should the car be surrendered or repossessed and a deficiency balance existed.

No reaffirmation agreement was typically necessary. (read more about what a reaffirmation agreement is here)

Not signing a reaffirmation agreement was good for the debtor because he obtained the best of both worlds as a result. i.e. Keep the car and make the payment, but not be liable on any deficiency balance should he not be able to afford the car down the road and after surrender.

Many attorneys felt as a result, that advising a client to sign a reaffirmation agreement with the creditor on the car loan inside of the bankruptcy case was malpractice. Especially if the car was upside down, i.e. it was worth much less then what was owed on it.

If the reaffirmation was signed unnecessarily and the debtor lost the car down the road he would then owe what sometimes amounted to a large deficiency balance nullifying some of the "fresh start" benefit gained in the bankruptcy case.

Continue reading "Ride Thru, Reaffirmation Agreements and the Ninth Circuit Court of Appeals" »

In light of a recent and important case from the Ninth Circuit Court regarding "reaffirmation" agreements, it may be a good time to talk about what a reaffirmation agreement is.

Technically, such an agreement in bankruptcy law is made between the debtor or the person who filed the bankruptcy, and the creditor who was owed money prior to the bankruptcy filing. That agreement "waives" the discharge of the debt that would occur at the end of the case if nothing were done.

In english...debtors owe creditors money for things like cars and houses. Those creditors maintain a security interest in the home or car to protect them should the debtor not pay.
If the debtor fails to pay for the home or car, the creditor will repo or foreclose to try and recoup the loss, and then maybe, especially where cars are concerned sue the debtor for any remaining balance owed.

When a bankruptcy is filed by the debtor, that obligation to pay on the particular debt will be discharged or wiped away should the case reach a successful conclusion.

What happens if the debtor gets the discharge of the debt and the creditor with the security interest is not being paid?

The creditor will eventually take the asset that was previously acting as security anyway, but the debtor will be free from ever paying the debt back.

The problem? The debtor doesn't want to lose the asset.

He or she simply wants to pay as they were, and keep the house and the car.

Prior to 2005, most Courts allowed for the debtor to simply continue to make the house and car payment directly to the lender, and NOT sign a reaffirmation agreement in Bankruptcy. Most of the time, the lender simply accepted the payments and continued as if nothing had happened.

BUT something had, because no reaffirmation agreement was signed, the debtor got the best of both worlds. He or she kept the asset, continued making payments on it, but the obligation to pay was gone.

Continue reading "Arizona Bankruptcy - Reaffirmation Agreement, what is it?" »

The typical consumer files a bankruptcy case in order to obtain a "discharge" of overwhelming debt. An unfortunate word that is used to describe what for many is a life changing "event". Why?

When a debt is "discharged", the obligation of the debtor to pay it, no longer exists. The obligation is simply gone...poof. It is government intervention in the realm of private contract relationship at it's "finest", and with some careful planning and preparation, it works like a charm.

Having said that, this powerful discharge has it's limits.

1. It doesn't deal with every debt. Some debts cannot be "discharged" by statute, like child support, newer income tax debt, spousal maintenance etc.

2. Even though the personal liability may no longer exist as a result of the "discharge", liens recorded against the debtor's property, may survive the bankruptcy unless they are modified or removed.

3. You can't get very many of them too close together. There are time limits that prevent "serial" bankruptcy filings and thus too many discharge "events". The creditor has to have some time to collect the debt between discharge dates.

4. Not everyone needs bankruptcy for purposes of obtaining a discharge. Some need it for other reasons, like saving a home from foreclosure or restructuring the repayment of debt. These people don't care as much about the discharge as others.

For those debts like credit card, repossession related, old income tax and medical bill debt that are typically governed by it, not only are they "gone", the discharge acts as a "permanent injunction" or a court order at the close of the case, against those same creditors. It replaces the "automatic stay".

If the creditor continues, post discharge, to attempt collection, that order is being violated, and can result in "punishment" for the offending creditor. Possibly even "punishment" in the form of money to the debtor.

If you have overwhelming debt, have been losing sleep consistently over it, and see no way to pay it in a reasonable amount of time, you probably need to "aquaint" yourself with the "discharge" provisions of the U.S. Bankruptcy Code.

Chapter 7 Bankruptcy is also known as a "straight" or "liquidation" bankruptcy. In a chapter 7, if the debtor qualifies to file based on his or her "inability" to pay debt, non exempt assets will be sold and given to creditors and most remaining debt then will be "wiped" away (discharged).

Chapter 13 Bankruptcy is also known as a "wage earner plan" or personal "reorganization". In a Chapter 13 bankruptcy, the debtor with a "regular" income, is able to keep non exempt assets and pay some portion of the debt over a 3 year to 5 year period. Sometimes the debt paid is a small amount and sometimes it is larger, depending on a number of different factors including the amounts of the debtor's income and budget, types and amounts of debts, and the debtor's non exempt asset value.

Certain debts that cannot be discharged in Chapter 7, can be discharged in Chapter 13.

Chapter 13 also provides a mechanism for individuals to prevent foreclosures and repossessions, while catching up on their secured debts.

Chapter 11 bankruptcy is a reorganization case as well, and is typically only used by a debtor who doesn't qualify for either a chapter 7 or chapter 13 bankruptcy or a business entity.

In Chapter 11, the debtor will typically retain possession of assets and continue to operate the business.

The debtor devises a plan of reorganization which, if accepted by creditors can bind both the debtor and the creditors to its terms. Plans commonly call for repayment out of future profits, or a sale of assets.

Every so often, I read a letter or receive a call from an attorney or creditor after the filing of a client's bankruptcy, that attempts to explain to me the need for my client to file a motion with the local court to obtain a ruling as to whether the automatic stay applies to a collection case against the debtor.

Doing so is unnecessary. (although providing notice to the local court and other parties may be in order to ensure they are aware of the filing).

The filing of the bankruptcy petition alone invokes the bankruptcy code's automatic stay and it applies to collection activity in and out of court. (See 11 U.S.C. Section 362 of the bankruptcy code).

The "stay" provision takes effect the moment the case is filed and the debtor and his or her property is under the protection of the bankruptcy court itself with a few minor exceptions.

If you are in a bankruptcy case, and a creditor is continuing it's collection activity with knowledge that you have filed, it has probably violated federal law.

Talk to your bankruptcy attorney or a bankruptcy attorney experienced with automatic stay litigation in bankruptcy, if you are having this problem.

A bankruptcy filing becomes a public record. This means that anyone can see what you have disclosed to the court.

Most of my clients seem to understand this when speaking to me initially.

What they don't always understand, is that everything about your present financial life and many things about your past financial life, must be disclosed to the Court under the penalty of perjury.

You cannot exclude certain assets or debts from this disclosure requirement.

If you owe your cousin 2500.00 for the work he did on your home, and he considers himself to be a creditor of yours, you must disclose to the court that he is a creditor and propose to treat him the same as other creditors in a similar position.

If you re paid your cousin the money within a certain period of time prior to filing, you must disclose it.

If you owe child support or are owed child support you must disclose it.

The trade off for the loss of privacy is the "Fresh Start" or the removal of the obligation to pay on most debts.

The decision to make that trade, rests with the debtor.

If you file for bankruptcy, all collection activity by creditors must stop with a few exceptions. The part of the law governs this is called the "automatic stay".

So if a creditor is trying to collect from your or sue you based on a credit card, medical, breach of contract or other debt, they must stop all activity against you once you file.

They can't file a lawsuit, continue in a lawsuit, record a lien, report the debt to the credit reporting agency or seize property without permission from the court.

What happens if the creditor does continue with collection activity after notice of the bankruptcy has been received? They have likely violated the automatic stay rule and can be sued by the debtor. They may also have to pay damages and attorney fees.

I always suggest that if a creditor who is barred from collection by virtue of the bankruptcy filing continues to contact one of my clients, that the client or our office provide the creditor one more "notice" of the bankruptcy prior to suing. This notice usually goes out by phone and/or via a certified letter.

Most creditors "get the picture" and discontinue the contact.

Unfortunately, some continue. A lawsuit is then appropriate and often even necessary.

There are exceptions to the list of creditors who are completely barred from collection activity which will be discussed in further posts.

If you are in a bankruptcy and a creditor continues to contact you even after you are sure they know about the bankruptcy, you will want to speak to your attorney about whether a lawsuit is a good idea.

If you have credit card, medical bill debt, or other unsecured personal loans that are so large you can't pay them off in a reasonable amount of time, you will likely end up using one of the following options to deal with it.

1. Borrow your way out

In the recent past, most with serious unsecured debts would turn to their home in the form of a home equity line or second mortgage. This was a quick fix that usually provided a lower monthly payment to service the same amount of debt. The obvious problem now? Loans are more difficult to come by.

The other problem? The new lender will require that the home be pledged as security for the loan. Once that happens, the debt is here to stay. The borrower will eventually pay in full or lose the home. These loans are almost always of the higher rate and higher cost variety as well.

2. Non Bankruptcy Payment Plan - Consumer Credit Counseling

Many credit providers will work out a payment plan with you either directly or through a "credit counselor". These counselors or agencies gather your income and budget information, help you get organized, and propose a new payment arrangement to each creditor. The proposal typically consists of a reduction in the interest rate and a lower monthly payment. Problems do exist, especially where the debt is so high that no "payment plan" will ever catch you up.

For those with serious debt, the debt usually never goes away, the credit report continues to reflect late payments, and at some point a collector gets involved again.

If you are going to engage a credit counselor, make sure that 1. They are reputable 2. They are not doing something for you that you couldn't do yourself and 3. That the proposed plan is "doable" and will pay off the debt in full in a reasonable amount of time.

3. "Negotiate" your debt

Many unsecured credit card lenders will reduce the principal balance and accept a sum smaller then they are owed to "settle" the account. "A bird in the hand" as they say.

Once you have fallen behind on the debt, the creditor or collector has a "formula" that tells them how much they will accept to settle the account at any given time. If you are a bankruptcy candidate or if they believe that for some other reason they may end up getting less than they would like, they may adjust the amount downward.

The willingness on the part of these credit card companies has led to the growth of a horde of so called "professional" debt negotiators. You hear the ads on TV, Radio and if you listen to enough cable news, you start to hear them in your head.

Most of these companies include in their "pitches" things that aren't necessarily true. Things that lead you to believe that these credit card companies must allow you to settle your debt or that they have some secret that allows them to settle your debt for less than anyone else.

The truth however is a little different as follows:

A. You can probably do on your own what most "debt negotiation professionals" are able to do for you.

In order to have a shot at convincing the lender to settle for less than the standard, I find that you need to be a good candidate for bankruptcy and the creditor must believe that to be true, and you need to have the cash in your hand when you make the settlement offer.

If these two things aren't true, you are simply relying on the "good graces" of the creditor to determine the amount of settlement. That is all a "debt negotiation professional" does i.e. rely on good graces and a slick marketing campaign.

B. If you begin to make payments monthly to the "debt settlement professional" you will likely continue to get collection calls and you may even be sued before you come up with the funds to settle all the debts.

Monthly payments to the "debt negotation professional" does not stop the clock from ticking, nor does it stop the creditors litigation timeline. There is no secret word that the "professional" uses to magically stop the collection. Many people with serious debt learn this the hard way.

C. "Debt Settlement Professionals" are very expensive and you are vastly overpaying for what you get.

In essence, you are paying the company to set up an accounting system to collect and track your money. When they are paid the estimated amount for their fee and the estimated amount needed to settle, they make some phone calls. If you are sued in the meantime, they "earned their fee" for magically keeping the debt collector from suing you until then.

I have reviewed dozens of the contracts they use, and know that most people taken in by these operators pay a "set up" fee, a monthly fee and a percentage of either the total debt or the amount saved. For a debtor with $100,000 in credit card debt who settles the debt for 50%, or $50,000, the overall fee is usually $12,000 to $20,000.

Before you consider paying these types of fees, contact your local bankruptcy attorney. Ask him or her to put together a bankruptcy case if you are a good candidate for bankruptcy. Then ask them to use it and your funds as leverage to negotiate with your creditors on an hourly basis.

You will pay far less and likely get a much better result. One governed by Arizona State Ethics Rules for Attorneys.

D. Forgiven debt is taxable

Unless you fall under the "insolvency" exception, you will have to treat the forgiven portion of the debt as income on your tax return. Bankruptcy is the other exception.

E. While you are waiting to save the money to settle your credit score is being destroyed

Most creditors don't seem to be interested in settling unless you are late on your payments. Most people who engage the "professional debt negotiator" stop making payments and never start again. The plan falls apart, they still have the debt and the 10 months of late pays on the report. Thanks.

4. File for Bankruptcy

Filing for bankruptcy is usually the most comprehensive and effective method for dealing with serious debt. Bankruptcy can do the following:

A. Stops Debt Collection by virtue of the federally mandated "automatic stay"
B. Provides a means to save a home from foreclosure
C. Provides a means to save your car from repossession
D. Provides a potential means to reduce secured debt amounts
E. Discharges or wipes away most if not all of your consumer debt

Chapter 13 bankruptcy, allows you to pay what you can "afford" over a set amount of time to your creditors.

In almost every instance the amount paid in the chapter 13 is far less then a debt settlement negotiation will require you to pay.

There are downsides. Bankruptcy carries a stigma. It has become a bit more difficult to qualify to file, the workload to file has increased, it is a matter of public record and stays on the credit report for 10 years.

My clients go through a rigorous analysis process to determine which of the options described above is the best.