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Rachel Hunter, J.D. | Article

Options for the Resolution of Debts - Part Ii

12/27/2012
RESOLVING THE DEBT

There are several ways to resolve a debt: (1) by paying the debt in full, (2) by settlement of some type; or (3) by way of bankruptcy. Which you choose again depends on your circumstances and when you pay – either pre- or post-judgment.

If you have the means to pay the debt in full, then obviously you should do so. Payments can always be made directly to the creditor. Some courts, like NC, allow a debtor to also pay any debts for which judgment has been entered directly to the clerk of court.

If a lawsuit has been filed and payment is made in full, the creditor or law firm will dismiss the case. If preferable, get any case dismissed with prejudice. Those words “with prejudice” mean that any lawsuits on the debt cannot be re-filed again. If a judgment has already been entered and payments are made directly to the clerk of court, the clerk will automatically mark the judgment as satisfied upon receipt of payment. If paying the creditor directly, then the creditor has an obligation to mark the judgment as satisfied within 60-90 days of receipt of your final payment. Most states have procedures where this is not done. If a judgment is not marked satisfied, then the debtor writes to the creditor and demands that it be done. For creditors who refuse, the law may specify a procedure – usually, an application is made to the court and the court orders it to be done. There are also sanctions for those creditors who force a debtor to engage in such drastic remedies and they usually involve the debtor being awarded a small sum of damages and attorney’ fees.

There are different methods of resolving a debt. For a more in-depth discussion, see my article entitled Debt Consolidation, Debt Management & Settlement. If a debtor is seeking to settle the debt using debt negotiation, lump sum payments are preferred, Settlements can range from anywhere as low as 10% to 100% of the debt. Most credit card debt will typically settle for 20% to 40% pre-judgment and 50%-80% post-judgment. These are just general guidelines and may or may not apply to any particular case. Ultimate settlement depends on a whole host of other factors which is beyond the scope of this article.

Once the debtor and creditor agree on a settlement amount, the debtor should request a settlement letter indicating the balance owed, the settlement amount, how it is paid, where it is paid and when the settlement payment(s) will be due. If this is a debt with a debt collector or original creditor, then make sure the letter includes that there will be no further collection activity and that no further monies will be owed once the settlement is paid. If settlement is made after the filing of a lawsuit, make sure the letter includes an agreement stating that the lawsuit will be dismissed with prejudice once the settlement is paid. If a judgment is entered, make sure that the letter acknowledges that the judgment will be marked satisfied once the settlement is paid. Pay via money order or certified check and make a copy before it is sent. Keep the proof of payment and settlement letter forever as debts have a way of re-surfacing and you want to be able to prove that payment was made if that happens. Follow up any settlements by getting a closure letter acknowledging that the settlement was received, that no further collection activity will occur, that no further monies are owed and that the matter will be reported as “paid debt settled” or “paid collection account” to the credit bureaus. If a lawsuit is filed, get a copy of the dismissal. If a judgment is entered, then get a copy of the satisfaction of judgment once it is filed.

Finally, settlements are usually made in a lump sum or over a short period of time. If you want to resolve a debt, but want to pay in increments, the creditors will probably permit this. However, payments are made on the full balance and are typically 1% to 4% of the debt for things like credit cards. Again, this is an estimate and actual experience will depend on your unique situation. If a lawsuit has been filed, a creditor may want the debtor to sign an agreement authorizing the entry of judgment. The agreement, sometimes set forth in a separate document called a consent judgment or consent agreement, also will provide that the creditor will not seek to collect on the judgment by garnishing wages or seizing bank accounts or other assets for so long as the debtor makes the agreed payments. It will be up to the debtor to faithfully make the payments as agreed. The creditors don’t send a bill so it's important to be diligent about this and keep records. Make sure that any consent judgments specify whether or not interest will continue to accrue. Many debtors forget to factor this in only to find out that additional sums are owed.

BANKRUPTCY

Bankruptcy is the option of last resort. I liken it to possessing a nuclear weapon – a country would not set off a nuclear weapon unless it absolutely had to and there were no other alternatives left. I say this because bankruptcy has its own consequences and a debtor who obtains bankruptcy discharge may not be able to get another discharge for as long as eight (8) years (depending on the kind of bankruptcy filed.

I am not a bankruptcy lawyer and I don’t file bankruptcy. But as I deal with debtors, I need to know about it to advise clients of their options given their circumstances. So I will highlight the main features. Of course, this guide is not intended to be a substitute for an actual consult with a bankruptcy attorney.

There are two (2) kinds of bankruptcies that most individual persons file: they are bankruptcies under either chapter 7 or chapter 13 of the Bankruptcy Code. Reorganizations for municipalities is done under chapter 9, corporations and for high asset/debt persons are done under chapter 11, family farms/fisheries under chapter 12 and are beyond the scope of this article.

Chapter 7 Bankruptcy
Bankruptcy under this chapter is a “straight liquidation.” What this means is that the debtor files bankruptcy and gets to keep any property that is exempt under the federal or state exemptions. Any excess assets which exceed the exemption are turned over to the trustee and sold and used to pay the creditors. The debtor then gets a discharge.

The process is usually very quick and is completed within six (6) to twelve (12) months depending on how busy the court is. After the bankruptcy petition is filed, the debtor has what is called a 341 meeting within about 90 days after filing the petition. The debtor must attend the meeting and answer questions about the debts from any creditors that attend and/or the trustee. The debtor then gets a discharge.

Chapter 7 is not for everyone. As part of the 2005 amendments to the Bankruptcy Code, debtors must now undergo credit counseling in the six (6)-month period preceding the filing of the bankruptcy petition. Usually, this is not an obstacle. Of greater importance is the fact that the court now “means tests” individuals. The means test is really an income test. If a debtor has too much income or too many assets, then a chapter 7 bankruptcy cannot be filed and a debtor must consider a chapter 13 if he/she wants bankruptcy relief. The means test is complicated and income of the debtor and spouse (if any) must be evaluated by the bankruptcy attorney. And each state has a different means test.

Chapter 7 bankruptcies will stay on a debtor’s credit report for ten (10) years from the date of discharge. That does not mean that a debtor emerging from bankruptcy cannot buy anything on credit for ten (10) years. Usually, the debtor should start rebuilding credit immediately, but the debtor does need to consider what happened to land them in bankruptcy court in the first place. So while credit can be re-built the debtor needs to learn to use credit wisely if this was a problem.

Chapter 13

Bankruptcies under chapter 13 are sometimes called “wage earner” plans. This is somewhat of a misnomer as a debtor does not have to be employed. A debtor just needs to have a steady stream of income to enable the debtor to make the payments.

Under a chapter 13, a debtor still has to undergo the consumer credit counseling and still has the meeting with creditors. However, under a chapter 13, the debtor retains his/her assets. In exchange, the debtor and bankruptcy attorney come up with a plan as to what debts will be paid and by how much. Debtors who are behind on their mortgage payments and want to save their home from foreclosure will use the chapter 13 plan to get caught up on their mortgage. If no mortgage is involved, then a portion of things like medical, credit card or other dischargeable debts will have to be paid through the plan.

Plans are for a three (3)-to five (5) year period. Once a debtor completes the plan, the debtor then obtains a discharge.

Chapter 13 bankruptcies will stay on a debtor’s credit report for seven (7) years after the date of discharge.

Not all debtors are right for a chapter 13 bankruptcy. Five years can be a long long time and many things can happen. Payment plans may be too high for a debtor to manage for that length of time especially if the debtor loses his/her job or suffers some additional financial setback. If a debtor misses too many payments, the bankruptcy will be dismissed without a discharge and the debtor will be right back where he/she started. Other debtors have too many assets or an interest in inherited property for even a chapter 13.

Other General Considerations applicable to both Chapter 7 and Chapter 13

Where a debtor is are married and only one spouse has the bulk of the debts, then the bankruptcy can be filed by only the debtor spouse (this is only for equitable distribution states – community property states may have different rules). However, assets that are jointly owned will still have to be included. Also, if the non-debtor spouse does not file he/she will remain liable for any debts that are in his/her name.

As an example: a husband and wife have a home and both are on the mortgage. The husband has most of the debts and only he needs to file. He includes the mortgage in his chapter 7 bankruptcy and discharges his liability but because his wife is also on the mortgage, the wife needs to keep paying the mortgage if they wish to keep the home.

Not all debts can be discharged in bankruptcy. Student loan debt (whether private or federal absent a hardship), some tax debt, child support, alimony and other things (like fraud, criminal penalties or restitution) generally cannot be discharged. A debtor will have to discuss with his/her bankruptcy attorney whether a debt is dischargeable.

Copyright (c) 2012 by Rachel Lea Hunter

www.rachelhunterlaw.com

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