The Financial Safety Net…In Case You Ever Need it. By Attorney Richard S. Ravosa As a hardworking, decent and honest person, no doubt you want to be able to pay your bills as they become due. With the slow economy and difficult job market creating financial uncertainty in the workplace, many individuals and families find themselves having to be creative in stretching their dollars to go as far as they can. Sometimes, that is not enough and they fall behind on credit card payments, auto loans, utility bills and even the mortgage. If you are among those who find themselves falling behind on your monthly payments, the best thing you can do is let your creditors know right away if you are having financial difficulty. Be prepared to explain why you fell behind on your payments and how long you anticipate being behind. Your creditors will appreciate your proactive approach and will often work with you through this rough patch, provided that you are able to bring your account current in the near future, however each creditor may have different policies. Sometimes, the financial blow is so devastating that it may be extremely difficult, or impossible to recover from, for these situations, there are other measures to consider. Debt settlement is an option for those who either have regular income to settle their accounts by making monthly payments for an agreed time and then the balance is then forgiven by the creditor, but this is often a less than ideal option because the creditors often continue to charge interest and if one payment is missed, they usually cancel the deal and reinstate all past due amounts. Usually more effective than making monthly payments, is to settle your account for a one time “lump sum.” This means that you have agreed to pay, and your creditor has agreed to accept, less than you owe on an account and that the debt will be permanently settled and your account will be closed upon your paying the agreed amount. Whichever option you choose, make sure you get the creditor to send you a letter confirming the details of your settlement agreement before you enter into the agreement. Regardless of how much you save, one big drawback is that any amounts of money that have been forgiven by the creditor will be treated as taxable income by the IRS and the creditor will issue you a 1099 form and send the IRS a copy as well. It is best to consider this tax consequence before making any settlement agreements and to consult your tax preparer or accountant. Another drawback is that your credit rating will likely be damaged, but by making timely payments after your account is settled on your other bills, you can gradually increase your credit score. If settlement is not an option for you, then it may be time to consider bankruptcy. Many people try to avoid filing bankruptcy by cashing in or borrowing money from their retirement accounts and 401K plans; this is a mistake, because if you file bankruptcy, in most states, your retirement account is usually protected by state or federal laws. Most people seeking to get rid of credit card debt, medical bills, utility bills and old mortgage balances leftover from foreclosures, can file a Chapter 7 bankruptcy and be debt free in about four months—with no tax consequences from getting rid of your debts. Because Chapter 7 is over and done with relatively quickly, it is the legal equivalent of gastric bypass surgery for people who are experiencing unmanageable debt, and like any surgery, you should evaluate all your options and alternatives before you commit to the procedure. Chapter 13 bankruptcy is a type of bankruptcy where the court gives you protection from your creditors and also gives you more time to catch up on past due debts, so long as you agree to repay your creditors and can do it in monthly payments over three or five years. Chapter 13 is a valuable tool for someone who wishes to stop a foreclosure of their home and who has regular income to catch up on the past due mortgage payments. Either Chapter 7 or Chapter 13 can give you immediate protection from your creditors and will stop other unpleasant collection activity such as wage garnishment, vehicle repossession, foreclosure and the filing liens or attachments on your property. Whichever means you choose to resolve your financial problems, it is usually best to consult an experienced attorney who can advise you of what the benefits and consequences are of any given course of action. Remember that most financial problems are temporary situations and do not let it define who you are and always remember, there is always a way to overcome debt with dignity.
Posted on: Tue, 11 Mar 2014 13:56:43 +0000
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