Whether they choose a Chapter 7 or a Chapter 13, a bankruptcy offers people a means of getting out of debt, but bankruptcy is not for everyone. The knowledgeable attorneys at The Law Offices of John W. Lee, P.C., draw from more than 70 years of combined legal experience to offer individuals alternatives to bankruptcy that could allow them to achieve a fresh start while rebuilding credit.
For people wishing to use bankruptcy as a last resort, the following options might be available:
- Negotiate with unsecured creditors
- Consolidation of debt
- Mortgage debt negotiations and refinancing
- Real estate short sales
- Credit counseling services
- Doing nothing
There are advantages and disadvantages associated with each option that consumers must understand before making a decision. Discussing the options with an attorney ensures debtors that whatever choice they make is the one best suited for their circumstances.
Negotiating with Unsecured Creditors
High interest rates on personal loans and credit cards can make it difficult for Virginia borrowers to reduce their principal balances. A bank, credit card company or other lender might agree reduce the rate of interest on the debt. This results in a larger portion of the payment borrowers make each month going toward reducing the principal, so they pay off the loan sooner.
It is possible that negotiating with creditors could lead to reduction in the principal owed by debtors. Although creditors are under no obligation to accept less than the full balance owing on a debt, they might be willing to accept less in exchange for a lump sum payment now rather than monthly payments over the remaining life of the debt.
If negotiating with creditors leads to part of a debt being forgiven, it could create a tax obligation for the borrower. The tax laws might treat the forgiven portion of the debt income upon which a person could owe taxes.
Borrowers whose creditworthiness permits it might consider obtaining a loan with a low rate of interest to pay off their credit cards and loans. Besides reducing the amount of interest they pay each month, this method of debt consolidation could lead to lower monthly payments.
Sometimes debtors will cash out an investment, inheritance or retirement to raise money to pay lump sum settlements to their creditors. Oftentimes a creditor will lower the balance owed by fifty percent for a lump sum settlement.
Debt consolidation can also be achieved by transferring outstanding credit card balances to a credit card offering a lower rate of interest, but debtors should not do this if the lower interest rate offered by a credit card company is a limited-time introductory rate. Once the introductory rate expires and the interest on the debt increases, credit card holders could face the same financial hardships they experienced before they consolidated the debt.
The bankruptcy attorneys at John W. Lee, PC can help you negotiate lump sum settlements with your creditors.
Mortgage Debt Negotiations
Banks and other mortgage lenders offer programs for Virginia Beach homeowners facing financial challenges. Negotiating with mortgage holders may lead to mortgage refinancing or loan modification through one or more of the programs they offer. Most lenders would prefer to keep borrowers in their homes by restructuring their mortgages, including the following:
- Reduction of interest rates
- Modifying the principal balance by adding missed payments and extending the number of years left on the mortgage
- Converting adjustable rate mortgages into fixed-rate loans
Any of these modification options make it easier for borrowers by reducing the amount of their monthly payments. The disadvantage of loan modification is that borrowers must meet eligibility guidelines to qualify for them.
An outcome of negotiations with a mortgage lender might be a mortgage refinancing arrangement. Refinancing could lower monthly payments by reducing the interest rate, but this option would probably not be available to someone with poor credit.
Real Estate Short Sales
Many Chesapeake or Newport News homeowners feel trapped because what they owe on their mortgages exceeds what they would receive on a sale of the property. A short sale offers a way of getting out of debt for homeowners finding themselves in that situation.
In a short sale, a home is placed on the market with the mortgage lender agreeing to accept less than the balance remaining on the loan. Although a homeowner benefits from being able to sell the home, the amount of debt forgiven by the lender could create an income tax liability. Individuals should speak to an attorney familiar with short sales before placing their home on the market.
Debt Consolidation Companies
Debt consolidation companies help consumers pay off unsecured loans and credit cards. Typically, they will set up the consumer on a monthly payment plan and then contact the creditors to arrange for settlements. The creditors are not required to work with debt consolidation companies and do not have to accept their settlement offers.
Often, one or more of the consumer’s creditors will not participate in the debt consolidation program. That creditor will pursue legal action, including garnishment, against the consumer; forcing the consumer into bankruptcy. Before signing up for a debt consolidation company, you should consult with an experienced attorney – there may be better options.
It might seem strange to consider it as an alternative to bankruptcy, but doing nothing might be a viable solution for some individuals. People without assets or income that could be seized by creditors are frequently referred to as being "judgment proof" in the sense that a creditor obtaining a judgment would be unable to collect payment on it from anything owned by the debtor.
If a Virginia debtor owns a home he is most likely not judgment proof in that the creditors may be able to attach liens to his house. The Virginia home exemption or homestead exemption allows a homeowner to protect $5,000 of the equity in a home from creditors or in a bankruptcy proceeding.
There is an additional exemption of $500 for each of the debtor's dependents. Debtors who are 65 years of age or older can exempt up to $10,000, and married couples can double the amount of the exemption. There are special Virginia home exemption rules pertaining to surviving spouses and situations in which only one spouse owes the debt.
Debtors who do not own houses or other assets that are on fixed incomes like social security or disability may be judgment proof and could elect to “do nothing.” However, before you elect to “do nothing” you should consult with an experienced attorney because there may be better options.
A Hampton Roads Law Firm Offering Advice and Guidance
The dedicated attorneys at The Law Offices of John W. Lee, P.C., have the experience and knowledge to offer people options and alternatives for their financial challenges.
We have four convenient Hampton Roads locations in Virginia Beach, Hampton, Chesapeake and Newport News servicing the surrounding cities of Norfolk, Portsmouth, Suffolk, Smithfield, Poquoson and Williamsburg and the York, James City and Gloucester counties.
Whether the services needed are negotiating with unsecured creditors on behalf of a Hampton Roads debtor or the development of a strategy for rebuilding credit, find out more about what they can do by calling (757) 896-0868 to schedule a free and confidential initial consultation.