Legal Options for Debt Relief

If you're drowning in debt, you have options--there are several different legal ways to seek debt relief.

Debt Settlement

Debt settlement is when a creditor or lender agrees to accept less than full payment as payment in full. They will do this if they can be convinced what you are offering is the best they can possibly get—so better to take it without incurring the cost of a lawsuit then sue you and end up with the same amount (or possibly less, if you declare bankruptcy—see below). Note that debt settlement is purely voluntary on the part of creditors—they don’t have to accept less than payment in full, on time. Therefore, this is a process of negotiation, and an experienced negotiator can help you succeed.

Be wary, though, of debt settlement companies that operate by “banking” your money and not paying creditors, holding out until creditors are desperate for payment and there’s enough accumulated for a large, lump sum payment on your debt. The problem is that there is no legal right to do this, so if you stop paying your debts on time, you will be in default and could be sued, as well as suffering damage to your credit rating.

Debt Consolidation

This is when one or more higher-interest or shorter-payment-terms debt is replaced by a single debt at more favorable terms. For example, taking out a home equity loan at, say, 5% (and which will be partially tax deductible, too) to pay off credit cards and some medical bills is a form of debt consolidation. Debt consolidation will not reduce your indebtedness—and in fact, it may increase the total owed, such as through loan origination fees or by extending the number of years over which the debt is paid, which will increase the amount of interest paid—but it can reduce the interest rate and/or the monthly payments, making your debt more manageable.

Bankruptcy

Bankruptcy is a set of laws that give debtors a fresh start. It does this by paying creditors as much as possible, then wiping out (“discharging”) any remaining debts. The two primary types of bankruptcy for private citizens are Chapter 7 (liquidation), in which most of the debtor’s assets are liquidated and distributed to creditors, and Chapter 13 (debt adjustment), in which a court-ordered repayment plan (basically a budget) is developed under which the debtor will pay creditors as much as possible over 3 – 5 years.

Bankruptcy can be very complex; also, not all debts are wiped out by bankruptcy. For example, secured debts, like mortgages or car loans, have to be paid, at least in part, or else the debtor will lose the property serving as collateral. Also, some debts, like taxes, alimony, child support, and student loans, are difficult to discharge. However, if you are suffering primarily from unsecured debt, like credit cards or medical bills, or from secured debt where you’re not as concerned about the property, bankruptcy can be a powerful tool.

How an Attorney Can Help

An attorney can help you understand the pros and cons of the different options. A lawyer can also negotiate with creditors on your behalf and, if necessary, guide you through the bankruptcy process.

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