When people are being sued for debts, they often panic and look for the quickest, easiest, least scary way out. And bankruptcy often occurs to them as the solution. This is understandable because they are being threatened with eviction or the sudden loss of their bank accounts or wages. Bankruptcy seems to offer a quick fix because actions by the debt collectors are “stayed” (stopped) during the bankruptcy proceedings.
I believe there are much more effective ways to handle old debt, especially credit card or merchant account debt that has been sold to a debt collector. Panic is not necessary, and bankruptcy is often not the best solution in a real-world sense. Here’s why. For the video, go to: http://www.youtube.com/watch?v=PJrQHc1lDPY.
Debt is divided into two types: “secured,” and “unsecured.” Secured debt means that the debt has specific assets backing it—if you miss payments, you can have your house foreclosed or your car repossessed and sold to pay off the loan. These things “secured” the debt and can be sold if you stop making payments.
Unsecured debt is debt that is not secured—it isn’t attached to any specific assets. Just because a debt is “unsecured” does not mean that you cannot be sued for the debt, of course. On the contrary, it means you must be sued in person for the debt collector to collect money from you. Debt collectors often don’t mention this fact to people they are harassing to try to collect from. If and only if the creditor can get a judgment against you, it can collect money by “enforcing” the judgment against you by garnishing wages or attaching accounts. But this can be difficult for various reasons.
Lenders on secured debts are in a much better position than those who are not secured. One of those advantages comes in bankruptcy.
In the law, the item securing a debt (the “security”) is really regarded as belonging to the creditor who lent the money. Specifically, consider a mortgage on a house. The house “secures” the debt, and if you stop making payments the bank can take the house and sell it to pay the debt. In the bankruptcy law, it is considered unjust to allow someone not paying for the property to keep it from the rightful owner. So the lender typically asks for the bankruptcy “stay” to be “lifted” so that foreclosure can take place. Although this can sometimes be delayed, the courts usually “relieve” the lenders and allow them to foreclose on secured debt. (Of course there are times when the delay is helpful to the consumer, but it is expensive, and in my observation it rarely helps at all.)
With unsecured debt, on the other hand, the debts are simply added up and paid according to how much money the bankrupt person has. Usually very, very little. And only at the end of the bankruptcy procedure. So bankruptcy could offer some help with unsecured debt.
What all that means practically is that if you have a large secured debt (mortgage) that you cannot pay, bankruptcy will offer you very little protection. If you have a large unsecured debt, bankruptcy will protect you, but it is slow, time-consuming and expensive compared to defending yourself against the debt collector.
Some examples may make it clearer.
Consider the Smiths. The Smiths have a house and make payments of $2.500 per month. Mr. Smith loses his job and they fall behind in their payments. If the family seeks bankruptcy as their house payments add up, the lender will obtain “relief from the stay” and foreclose on the house. The Smiths are out of luck, and bankruptcy usually does not help. This may change somewhat if some of the bankruptcy legislation goes, through.
Now consider the Joneses. If the Joneses have credit card debt of $25,000 and Mrs. Jones loses her job so they can’t make payments, they could seek bankruptcy help. It would probably cost them at least a thousand dollars to file, require them to disclose most or all of their finances over the past year or two, and fill out a vast amount of paperwork. At the end of the proceeding, at least a year later, their debts would be wiped out. But so, of course, would their credit reports. The bankruptcy filing will remain a mark against them for seven years.
The Jones could, however, simply defend themselves against the lawsuits brought by the debt collectors. For reasons I’ve made clear elsewhere in this blog and at http://yourlegallegup.com, their chances of winning the suit would be excellent. And if the Jones do it right, they can simply get the debt eliminated. This does not usually mean completely cleaning their credit reports, but it can often mean canceling the debt and removal of the recent credit report damage inflicted by the debt collector. And it usually will happen in less than six months from the date the debt collector brings suit.
They can do it all themselves for almost no money at all and probably less time and effort, all told, than a bankruptcy would require.
Better results, less cost. That’s why it’s often better to defend yourself against credit card debt than to seek bankruptcy protection.