So, you are a Minnesota lawyer with a clientele from all walks of life. How many times have you heard a client say they have overwhelming debt? The answer is probably a lot right? And how many times has the suggestion to solve the problem been maybe you should consider debt consolidation? The answer agin is probably a lot right?
When we meet with clients, when they discover there is actually a government sponsored debt consolidation plan, with a lot of great perks, they are often shocked and very pleased. If they are in a traditional debt consolidation plan, they quickly quit that program and start the better government sponsored program- a program that allows you to pay what you can afford to pay, with no interest, for a limited amount of time, and to the extent the debt does not get paid off, it gets wiped out forever, tax free!
The program I will describe in detail allows folks to pay for a limited duration- minimum 3 years and a maximum 5 years, and whatever is not paid off at the end of the plan gets wiped out, tax free, forever.
THE PERILS OF TRADITIONAL DEBT CONSOLIDATION
It is perfectly natural for human beings overwhelmed with debt to want to avoid anything to do with the “b” word. It is also perfectly natural for people to want to pay their debt back. We all do.
This is why many Minnesotans, saddled with debt, first turn to debt consolidation programs of one kind or another. But, I would argue, by doing so, your clients are wasting their time and money. There are better alternatives as you will see in a minute.
First, before we consider the alternative to traditional debt consolidation, what are the pitfalls of traditional debt consolidation? Why would we never recommend anyone do traditional debt consolidation? There are numerous reasons but here are a few.
1) YOUR CREDIT STINKS!
Think about it. You opt into a debt consolidation program. What are you telling your credit world? You are telling them you are sinking and need help. You are telling them you cannot pay your bills as they come due.Bottom line is you are a walking bill board that you are in financial distress and your credit score will take a BIG hit. If your credit score takes a big hit, why are you avoiding a conversation about the “b” word?
2) TRADITIONAL DEBT CONSOLIDATION PAYMENT IS TOO BIG
Let’s face it, in traditional debt consolidation who do you think eats first? The creditors do of course. Your creditors eat first and your family eats second so going into it, your family is going to suffer at the hands of your creditors.
If you end up with a payment you can’t make anyway, why bother with traditional debt consolidation?
3) CREDITORS ARE NOT FORCED TO PARTICIPATE- AT ALL
One of the biggest problems with traditional debt consolidation plans is creditors are not required to participate in the plan- at all! Think about this, you are a creditor who is owed 10k by the debtor and the payment is $600.00 per month.Would you accept a payment of 150.00 per month knowing that you could garnish the debtor’s wages and take $750.00 per month? I bet you would not participate either.
So instead, what happens is creditors continue to pursue debtor, sue her, and eventually garnish wages and freeze her bank accounts. Meanwhile, debtor calls the debt consolidation company, the one that painted quite the rosy picture for debt consolidation and debtor can no longer get a hold of anyone- and if she does, she now gets the b-squad players who seem to be indifferent to her needs.
4) YOU DON’T GET YOUR LIFE BACK FOR A LONG TIME
Traditional debt consolidation programs can go on for a really long time. Without any sort of legal protection, your credit suffers, along with your family, for a really long time. Most people don’t mind having problems, but is the solution something that really drags out this long really a solution?
5) YOU PAY TAXES ON DEBT THAT IS FORGIVEN
Generally, debt that is forgiven is taxable to you. If you have 20k that gets wiped out in a traditional debt consolidation program, you will pay taxes on the 20k. Now, to be sure, paying taxes on 20k is better than paying 20k.
We only point this out so you understand it’s not just the payment you will pay, it’s also taxes on debts forgiven that you will pay as well.
When you pay less on the debt, less than you contractually owe that is, it doesn’t look good on your credit report. And then to top it off, you pay taxes on debt forgiven. Seems like they kick you when your down.
There is a much better way. Allow me to discuss the plan first and then I will tell you what they call it.
The BETTER WAY
1) A GOVERNMENT SPONSORED DEBT CONSOLIDATION PLAN
It’s a government sponsored debt consolidation plan. While you are in the plan, debtors are legally protected from their creditors and creditors are barred from collecting debts from debtor as long as debtor is on the plan.
So many debt consolidation plans fail because a single creditor refuses to play ball with debtor. In this plan, creditors cannot collect from debtor involuntarily, while in the plan. Being legally protected from your own creditors is better than being exposed to them.
2) A PAYMENT YOU CAN AFFORD TO MAKE
In this plan, the debtor makes a payment based on what they can afford to pay not based on what creditors want you to pay. The payment into the plan is determined by what is left over AFTER debtor pays her/his monthly expenses. So, your family eats first, creditors eat second.
This is the opposite of traditional debt consolidation where creditors eat first and debtor tries to survive on what’s left over.
When your payment is based on what you can really afford to pay, your family can breathe again.
3) A FIXED PERIOD OF TIME TO PAY AND THEN YOU ARE FINISHED
The plan can be a minimum of 3 years and a maximum of 5 years. But, the nice thing is it can never be longer than 5 years. So, you know going into the plan, that after 60 months, you will be finished no matter what.
The fact that the plans can never go longer than 5 years is a huge benefit to debtor. You know going into the plan when the plan will end. There is comfort in knowing the end date.
4) MOST PLANS ARE NOT PAY IN FULL PLANS
Many people think that when you do debt consolidation you pay all your creditors in full. That might be true for traditional debt consolidation plans, but it certainly is not true for this government sponsored plan. This government sponsored plan only requires that debtor use his/her best efforts to pay what debtor can afford to pay, for a defined period of time, and then whatever debt is not paid off, gets wiped out forever!
Think about this. Your client has 50k in credit card debt right? In traditional debt consolidation they will likely pay 50k plus some interest. If it is less than the full contract rate of interest, the client will need to pay taxes on the difference.
However, on this government sponsored plan, the client would only pay what they could afford to pay, and no more. So, for example, if the client paid 10k and that is all they could afford to pay, the balance of 40k plus all of the interest would get wiped out (discharged) tax free, forever!
That is amazing amount of relief and yet the client gets to keep paying their monthly bills without being pestered by creditors for payment they cannot afford to pay.
5) YOU GET YOUR LIFE BACK, AND TAX FREE!
In this government sponsored plan, you get your life back sooner and tax free! I have always felt like taxing debts forgiven was a bit cruel since if you would have had the money you would have paid the debt in full- and then to be taxed on top of it just seems cruel.
The beauty of this plan is that you have a fixed period of time that you make payments you can afford to pay. Following this fixed period of time any remaining unpaid debt gets wiped out, tax fee, forever!
The government sponsored debt consolidation plan takes the cruelty out of having little money out of the equation. It provides mercy to those people who are trying to repay their debts but when the bill collector calls and wants a ridiculous payment they don’t have, this plan put them on equal footing with their creditors and makes the creditor accept only payments the client can afford to pay.
When you put the power with the client, the client wins- always. And mind you, it’s not that the client is looking to “win” but the client and their family is looking to breathe!
6) AFTER DISCHARGE, CREDIT SCORES TYPICALLY IMPROVE DRAMATICALLY
What? Are you telling, me that if I don’t pay all my debt, my credit score will improve? Yes- why? Because after discharge, when you are no longer legally liable for your debts, you are a better credit risk because you have no debt. Think about it. I come to you and want to borrow 50k to consolidate my credit cards I am struggling to pay- which is why I come to the bank. Will the bank lend me money? Doubtful. Why? Because the bank fears that you may not be able to pay them back the money they now will lend you- they don’t want to be the last person holding the bag, right?But that same bank will likely lend you money if you come in to borrow money but you are debt free after discharge. Why? Because you have no debt and the chances of the bank getting paid back are now higher. At the end of the day, banks don’t care if you pay other creditors but they do care if you pay the bank back.
To be clear, not paying debt back is a negative on your credit reports. However, being legally debt free is also very important to banks. After all, the banks ultimately want to know will you pay them back or not.
THE GOVERNMENT SPONSORED PLAN
The plan that I speak of is a chapter 13 bankruptcy plan. Now, if you take the “b” word out of the equation, this government sponsored debt consolidation plan is far better than traditional debt consolidation plans in almost every respect.
If you credit suffers either way, why would Minnesotans not choose the plan that gives them the best leverage and outcome for their family? I feel bad for Minnesotans suffering through large unwieldily payments they cannot afford when there are alternatives available to them.
Don’t let your clients be afraid to explore all of their options before they make a decision on how to solve an overwhelming debt problem. Your sage advice to consider even bankruptcy options could save the clients years worth of physical and mental anguish and needless suffering.
In the end, when the right decision is made, regardless of whether it includes a bankruptcy or not, your client(s) will sleep easier knowing they have chose the best option to protect their family. At the end of the day, that is all that matters. But, sending clients off to do traditional debt consolidation in Minnesota may not be there best option. Ask Mike from Minneapolis who spent years in traditional debt consolidation only to find out that he should have done a bankruptcy years ago.
Instead, Mike should have filed a chapter 13 bankruptcy in Minneapolis years and years ago. It would have saved him a ton of money and a lot of heart ache. Do you know who referred him to a bankruptcy attorney? His lawyer did. Now that was some sound legal advice!
