Life is humbling is it not? Who among us starts out in life with the dream of incurring overwhelming debt we cannot pay for? Naturally, none of us do. And yet, it happens to 10,000 plus Minnesotans each year. At Kain & Scott, we have been practicing bankruptcy law since 1972. We have never seen a person yet who says something like- hey, I just got back from a fabulous trip with all my friends, using my credit cards, knowing I was going to file bankruptcy when I returned.
Rather, businesses fail, income drops, relationship’s end, medical bills happen, and we all make bad financial decisions. If you want to talk about mine, this blog would be a book! When in college, I went four years without medical insurance. Not smart but I did. I was really lucky in that I never had a medical emergency in those four years. Some are not so lucky. I was, that is the way life works. I know that I could have easily had to file a bankruptcy back in college if I broke any bone in my body or had any other serious ailment.
Bankruptcy is never the first choice, and we understand that. Bankruptcy is always the last resort unless the debt is so overwhelming that considering anything else is a waste of time. In most instances, people will juggle their household finances to make the minimum payments on their debts. When making the minimum payments becomes intolerable, it’s time to go to plan B. Sometimes plan B involves consolidating credit cards onto other credit cards with lower interest rates or lower introductory rates. Sometimes plan B involves using one card to make payments on another card or making payments on a card only to turn around and use it to pay bills.
At some point, the juggling act becomes way too much to bear. When this happens, the first thing most people do is turn to Debt Consolidation, many of whom you see on tv or hear on radio. When you see/hear their advertising spots you want to tear up, the promises they make are music to your ears/eyes. Sometimes, when I see/hear these spots run, it makes me feel like an e-harmony spot- kind of gives you the warm fuzzies.
Many of these debt consolidation companies are out of state and some of them are owned or co-owned by credit card companies themselves. At Kain & Scott, we have been practicing bankruptcy law since 1972, and here is what we found: We have found What Debt Consolidation Companies Don't Tell You and that traditional debt consolidation is a complete waste of time. Why?
REASON 1:
When you enter into a debt consolidation plan, you are advertising to the world that you are in financial distress. Let’s face it folks, when you do debt consolidation, you are advertising to the world that you are in financial distress, you are like a walking billboard. Now, don’t get me wrong, wanting to do debt consolidation, is a noble thing. Wanting to repay your debts is a noble goal. However, the fact is, entering into debt consolidation is going to lower your credit score since you are by definition, changing the terms of your repayment agreement with your creditors.
REASON 2:
The problem with traditional debt consolidation plans is the creditors eat first, you eat second. When you call the debt consolidation company, my cynical view is they put their “A” players in those seats- you know their sales people who really know how to play on your emotions and sell you a debt consolidation plan. It all sounds very promising in the beginning and you hope this is the solution you have dreamed of.
Then, after you sign up and make payments for 6 months, you start to feel a little uneasy about this whole debt consolidation thing. Why? Well, to start off, your payment is way more than you can afford to pay. Oh sure, the payment is cheaper than had you continued to make your regular payments, but it’s still not a comfortable payment for you and your family. So, you call the debt consolidation company back and now, instead of dealing with the first person who signed you up, you know the bubbly, cheery, this is going to be great representative, now you have the what do you need representative, you know the b player.
So, you keep making payments on the plan they gave you. But then, it happens............WHY AM I BEING SUED IN THE MIDDLE OF MY DEBT CONSOLIDATION PLAN?
Ah yes, and now you learn the rest of the story. You see, when you do debt consolidation, creditors are not legally bound to any plan you create with the debt consolidation company. Here in lies the problem for most debt consolidation plans and How Debt Consolidation Companies Turn Lives from Bad to Worse.
Ask yourself this, if someone owed you money, say 10k, would you rather receive $100.00 a month or if you knew you could garnish their wages and take $700.00 a month, would you rather do that? The choice is easy- creditors are not bound and legally required to accept peanuts in a debt consolidation plan. Instead, they can choose to get a judgment against you and garnish your wages instead. Well, how come nobody told me this? That is a great question- because had they told you this, you may not have set up a traditional debt consolidation plan to begin with.
If you are thinking about trying debt consolidation, or are in the middle of debt consolidation, please read this last paragraph twice. I can’t tell you how many wonder Minnesotans I have had in my office who, after trying debt consolidation, learned the above lesson the hard way. Now does debt consolidation work for some? Sure- but be very wary of what you are being told and make sure you study reviews and reports on the company you are dealing with before you enter into a contract with any debt consolidation company.
REASON 3:
Why would anyone do traditional debt consolidation when there is a government sponsored debt consolidation plan available to just about everyone?
It is frustrating to watch so many Minnesotans suffer in a debt consolidation plans when there is such a better alternative to it. Chapter 13 Bankruptcy is a government sponsored debt consolidation plan with some really unique twists to it.
First, your creditors are bound by the bankruptcy filing and cannot collect from you once you file the chapter 13 bankruptcy. Second, your creditors are bound by the terms of the repayment plan and cannot later ask for more or try and garnish your wages.Third, your family eats first and the creditors eat second. In other words, in a chapter 13 plan, your payment is not based on what the creditors want you to pay, your payment is based on what you can afford to pay your creditors after your family’s reasonable and necessary expenses are paid. So, if you can only afford to pay $200.00 per month, that is what your plan payment is regardless of how your creditors feel about it. While it is true creditors can object your plan it is very rare this occurs and even more rare for there to be an objection based on income or expenses. Fourth, the chapter 13 plan term is limited to 3 years minimum and a maximum of 5 years. So, for many people, they make payments for 36 months, and to the extent the debts have not been paid off, they get wiped out (discharged) tax free, forever!
Let’s take a very basic example of how this would work. Bill and Jill owe 50k in credit card debt. They make 70k per year and have one child, six year old Ben. Bill and Jill were paying $1200.00 a month on their credit card payments. They were barely making ends meet when Jill and Bill found out that child number 2 is on her way! The good news was tempered by the sobering reality that another child means more daycare, more diapers, more formula, and other expenses. Both Bill and Jill had made attempts at debt consolidation in their early years but don’t have good experiences to report on this attempt.
In a chapter 13 bankruptcy, we could make Bill and Jill’s chapter 13 payment $200.00 a month for 36 months. That is a total of $7,200.00, not enough to pay all their creditors in full right? What happens to the balance of the unpaid debt? The balance of $42,800.00 gets wiped out (discharged), tax free, forever! A chapter 13 bankruptcy would be a fantastic solution for Bill and Jill. They would welcome their second child knowing that they could take care of their new child’s expenses and yet still make a payment back to their creditors they could afford to pay. That is a win-win!
Why Not Choose Chapter 13?
Why would anyone do traditional debt consolidation after reading this? We get that no one wants to say or mention the “b” word, but if what this is all about is protecting your family and paying your creditors what you can afford to pay, chapter 13 is spot on. If you know of any Minnesotans suffering needlessly from overwhelming debt, and you want to be there hero, you owe it to them to mention that they search out all of their options, both bankruptcy and non-bankruptcy options.
When I look to solve a problem, any problem, I want the best information possible so that I can make an informed decision and have no regrets. I hate wasting time on crappy solutions. Whenever I hire professionals, I have three requirements. 1) the professional must know what they are doing; 2) the professional must be kind and helpful, and 3) the professional must be an easy communicator, none of this leave a message and get a returned phone call 3 days later stuff.
At Kain & Scott, we are Minnesota’s nicest bankruptcy law firm guaranteed or 100% off our fees! Plus, we will hire a lawyer of your choosing to finish your case no questions asked- although feedback is great so we can improve our level of service to our clients.
