Starting Off on the Road to Financial Recovery in Powell, Lewis Center, Dublin, and Delaware, Ohio
Consumers may find themselves in a situation where they have debt that they cannot repay. In cases such as this, there are several options available.
The bankruptcy laws were created to protect both consumers and creditors, and they balance the consumer’s ability to repay with the creditors’ financial loss due to the consumer’s inability to repay the debt in full. There is a trustee involved who represents the bankruptcy court, and the trustee ensures that the debtor and creditors are each treated according to the law.
There are two types of consumer bankruptcy: Chapter 7 and Chapter 13, each named after the appropriate section of the bankruptcy code. Each type discharges the consumer’s debt differently.
A Chapter 7 bankruptcy filing discharges the consumer’s debt completely, regardless of how much they owe. However, the trustee may require the debtor to give up non-exempt assets to be used in satisfying some or all of the debt. For example, a debtor may be required to give up a vehicle with equity in it, which will be sold by the trustee and the proceeds used to reimburse the creditors for a portion of the debt owed to them.
A Chapter 13 bankruptcy filing is a more complex process than Chapter 7. The debts are still discharged, but Chapter 13 requires a repayment plan, often 3-5 years in duration. The debtor makes monthly payments to the trustee, who pays the creditors on behalf of the debtor. Upon successful completion of the repayment plan, the debts are considered discharged.
For chapter 13, the debtor may keep some assets, rather than having to relinquish them to the courts like in Chapter 7, which many consider to be an advantage of the Chapter 13 plan.
Another option that the debtor may pursue is to seek a settlement with each creditor. The debtor may enlist the aid of an attorney or agency in seeking the settlement, or the debtor may negotiate directly with the creditors. By negotiating with the creditor, the debtor may be able to reduce the amount required for repayment, sometimes as much as 35% – 75%. It is typically in the creditor’s best interest to negotiate a settlement, as it represents repayment of at least some of the debt owed.
However, the creditor is not required to agree to a settlement, and may choose to pursue collection of the total debt owed. If the debtor agrees to a payment plan and fails to make one payments according to the plan, the creditor may seek to collect the entire remaining balance, and impose fees or penalties as well.
Both bankruptcy filings and debt settlement negatively impact the debtor’s credit rating. A negotiated settlement that is successfully paid off may impact the credit rating the least, while a Chapter 7 bankruptcy may impact the credit rating the most. Consultation with a lawyer or agency who is well-acquainted with local bankruptcy and credit collection laws may be a good place for the debtor to start.