Alternatives to Bankruptcy
Are you overwhelmed by the mound of debt you owe. Are you behind on your mortgage? Credit Card debt? Auto loan? Lawsuits? Wage Garnishments? There are alternatives to a Chapter 7 or Chapter 13 bankruptcy. However, each one must be carefully considered before considering to file for bankruptcy. Each alternative has its pros as well as cons.
- Credit Card and Personal Loan Debt
If you owe a mound of credit card debt. There are ways of reducing the amount you may owe. You may consider debt settlement where you pay only a percentage of the amount you owe. For example, should you owe $10,000 to a credit card company, the creditor may take $6,000 to settle the debt. However, what consumers do not understand is that this is considered debt forgiveness. That is, the amount that is forgiven ($4,000), will be considered income to you. The creditor will 1099 you the following year and you therefore will owe taxes on this amount forgiven.
An additional problem with debt settlement is that one creditor may take an offer of $6,000 for a $10,000 debt, but you have 4 other credit cards for which you have not negotiated. Those other 4 creditors may not be as forgiving. Now, you have paid $6,000 to one creditor and still owe the rest in full. You are now back at square one.
- Auto Loans
Unfortunately, automobile loans are usually not very flexible when renegotiating a loan. Even while a debtor may be in bankruptcy, creditors generally do not renegotiate the amount you owe or the interest rate. However, they may extend the term of the loan so that your payments are a bit more manageable.
- Short Sale
Should you own a home but can’t afford to keep it, a Short Sale may be appropriate for you. A Short Sale means that the banks are willing to accept less than the loan amount when you sell your home to an approved buyer. Generally, you will not be pursued by the lender for the remaining balance. Should you perform a Short-Sale while in bankruptcy, you must seek approval by the Bankruptcy Trustee. That is why it is either best to perform a Short Sale prior to filing bankruptcy or immediately after discharge of your bankruptcy.
With respect to investment property, a Short Sale may not be the best option for you. The law allows the lender to 1099 you for any difference between what you owed on the mortgage and what the home sold for in the Short Sale. This difference will be considered taxable income to you. This scenario also applies to individuals going through foreclosure. The ideal option for consumers who own investment property is to file for a Chapter 7 or Chapter 13 bankruptcy. Additionally, there are options for consumers to reduce the principal of their home or investment property in a Chapter 13 – something to consider.
- Foreclosure
Foreclosure is an option. However, if you are attempting to reside in the house for a little while longer, or attempting a loan modification, bankruptcy might be the right decision for you. By filing for bankruptcy, this will stop the foreclosure temporarily. In addition, lenders are more willing to work out a loan modification with individuals that have filed for bankruptcy for various reasons. One reason may be that the debts you owed prior to filing for bankruptcy will now be considered discharged. Therefore, you have additional income to spend towards your mortgage. This situation may possibly qualify you for a modification.
- Loan Modification
A loan modification changes the terms of your mortgage. The lender may reduce the interest rate temporarily or permanently. The lender may extend the life of the loan from a 30 year to a 40 year mortgage. More often than not, the lender will not reduce the principal of the mortgage because they have no incentive to. However, by filing for Chapter 13 bankruptcy, it is possible to reduce the principal balance on your home or investment property. Contact our office should you wish to exmplore this option.
Feel free to contact our office for a free consultation! You may reach us at (800)921-6513. Or, complete this form to speak to an experienced bankruptcy attorney at the Law Offices of Alon Darvish.
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