Bankruptcy Alternatives Blog

Five Reasons Why Debt Consultants Are A Bad Bankruptcy Alternative

Credit and debt consultants advertise that they can settle your debts for cents on the dollar. It sounds too good to be true, and usually it is. They put you on a monthly plan where you pay hundreds of dollars per month, and they tell you they will use that money to make a debt settlement with your creditors. In many cases a debt settlement or debt management plan is a scam. It sounds good, but here are five reasons why using a debt consultant to deal with your debts is not a good idea:

First, a debt consultant doesn’t work for free. They will take the first few monthly payments you make for their fee. If they take the first 10 monthly payments for their fee, and then take another 10 payments for the settlement offer to the one of your credit cards, it will be 20 months before the first credit card company gets any money. It is not likely that a credit card company will do nothing for 20 months when they are not getting paid. If they are not getting paid, they will continue to call you, and they may take you to court and sue you. That’s not good for you.

Second, debt settlements will not work on all types of debts. The government will not accept a deal to get rid of your tax debt. They want their money, and they don’t make deals, because if they make a deal with you, they will need to make a deal with everybody, and that’s a bad precedent for them to set.

Third, the debt consultant has no way to force all of your creditors to accept the deal. One or two of your credit card companies may agree to a deal, but if the others don’t agree and sue you, the deal will fall apart. You need relief for all of your debts, not just some of them.

Fourth, in many cases the debt consultant is not doing anything that you couldn’t do on your own. Putting money in a bank account for two years, and then sending it to the credit card company, does not take much skill. You can do that on your own.

Fifth, many debt consultants will meet with you, review your situation, charge you a fee, and then refer you to an American bankruptcy attorney, or a Canadian bankruptcy trustee or consumer proposal administrator! They don’t actually do anything for you, other than tell you that you need professional assistance. Start with the professional; don’t pay the consultant first.

You have options, including a debt consolidation loan, a Chapter 13 Wage Earner Plan, and a consumer proposal. You can even file bankruptcy in Canada, or Chapter 7 Bankruptcy in the USA. Consult an expert today and review your options.

What are my bankruptcy alternatives?

As the North American economy continues to weaken, and every day we read news of bailouts, we get even more worried about our own personal financial situation. What can we do? If you are experiencing money problems and you think that personal bankruptcy is your only alternative, start with our five step program to avoid bankruptcy.

First, make a family budget. If you don’t know where your money is going, you can’t decide what spending to cut to free up cash to repay your debts on your own. Read our special report on budgeting for more information, and for some free tools to help you budget.

If your budget shows that you can afford it, your next step may be to try to get a debt consolidation loan. With a debt consolidation loan you consolidate your debts and make one monthly payment, at a lower interest rate than you are paying now. You need good credit to qualify.

If you don’t have good credit, your next option would be to consider credit counseling through a non-profit credit counsellor about a debt management plan. They may be able to work out a plan where you repay your debts over a longer period of time, at a reduced or zero interest rate.

If that isn’t affordable, a legal procedure may be necessary. In the United States you could file a Chapter 13 Wage Earner Plan. In Canada you could consider a consumer proposal. Either way, it may be possible to negotiate a legal settlement where you pay less than the full amount owing.

If even that is not affordable then, and only then, should you consider personal bankruptcy. Bankruptcy is a last resort, only to be considered if all other bankruptcy alternatives have been considered. You have options, so consider them wisely, do your research, and then make the decision that is best for you and your family.

What if I Just Stop Paying My Debts? Is Not Paying a Good Bankruptcy Alternative?

At some point in almost everyone’s life we get to the point where we just through up our hands and say “Enough: My debts are too high, so I’m just going to stop paying!”

For some people that may be the correct option, but it does have one significant danger: If you stop paying, it is possible that your creditors will take you to court, sue you, and attempt to garnishee your wages. If you own property, like a car or a house, they could attempt to put a lien on your property, seize it, and sell it to repay your debt.

If you currently own no property or have no wages, you are “creditor proof”, so doing nothing may be an option. If you get a pension or welfare, it is unlikely that those payments can be garnisheed, so there may be little risk of a garnishment. You could open a new bank account at a new bank that is not known to your creditors, and continue on until your situation changes.

However, if you do have a job, doing nothing is probably not the correct option for you. You need to take action. Try contacting your creditors and working out a repayment plan. If you need help, a credit counselor can meet with to determine if a debt management plan is the correct solution for you. If you still have good credit, a debt consolidation loan is another possible option.

If you live in the United States, a Chapter 13 Wage Earner Plan is a good personal bankruptcy alternative. In Canada, a consumer proposal is an excellent solution in many cases.

The point to remember is that doing nothing may be an option, but there are many other bankruptcy alternatives, so research your options and decide on the option that’s best for you.

Debt Management Plans and Consumer Proposals: Which is the Better Bankruptcy Alternative?

Note: a consumer proposal can only be filed in Canada. Americans can consider a similar procedure called a Chapter 13 Wage Earner Plan.

At first glance a debt management plan and a consumer proposal appear to be very similar. In both cases you make payments each month that are distributed to your creditors, so they are both a good bankruptcy alternative. There are, however, some significant differences.

A debt management plan is administered by a credit counsellor, while a consumer proposal is administered by a bankruptcy trustee. A bankruptcy trustee is an officer of the court, and therefore has the power to force creditors to accept the proposal. Here is how it works:

In a consumer proposal, each creditor gets one vote for every dollar they owe. If more than half of the dollar value of creditors votes yes, all creditors must accept the proposal. In a debt management plan, even if eight out of nine creditors vote yes, there is no way to force the final creditor to accept the plan. For that reason in most cases a consumer proposal is the preferred bankruptcy alternative.

In addition, in a debt management plan the creditors generally must be paid in full. In a consumer proposal it is often possible to get the creditors to agree to accept 50 cents on the dollar, or even less.

To file a consumer proposal you must be insolvent (owing more than you own, and being unable to pay your debts). Insolvency is not a requirement for a debt management plan, so that may be a reason to select the debt management plan option.

Which bankruptcy alternative is right for you? Contact a proposal administrator or a credit counsellor for more information.