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The Only Debt Consolidation Program That Is Not A Scam

Most of my days are spent working on straight Chapter 7 Bankruptcies in which my clients receive a Discharge of their debts without ever having to pay them back. But not all folks qualify for Chapter 7. Some people are disqualified because they make too much money or they have too many assets.  People who cannot file Chapter 7 must turn to alternatives to protect themselves from their creditors.

Some people might decide to forego bankruptcy all together and just let their debts go. If they do this, most of their creditors will likely sue them. In Connecticut, creditors have six years from the date of the last payment to commence legal action under our state’s Statute of Limitations. If folks decide to go this route, they can just deal with their creditors as they come after them. Oftentimes, this results in settlements. Settlements connote some debt forgiveness, and you must keep in mind that every dollar of forgiven debt is a dollar of taxable income. (There are no tax consequences in Bankruptcy.)

If a person can’t stomach looking over their shoulder for six years, then they can consider a different kind of Bankruptcy called “Chapter 13.”

I must insert here that some people in this situation may consider a debt consolidation program. Perhaps one that they have seen on TV or heard about on the radio. Please let me warn you now, most, if not all, of these types of programs are scams.

The scam goes something like this: The company tells you to stop paying your creditors and start paying them. They take monthly payments from you and save them for you after taking their cut off the top. They promise you that they will use this money to make settlements with your creditors but by the time they actually save up enough money to make meaningful settlements, your creditors have done an end-around and sued you. So now, you are out the money you sent to the program and you will need to spend more money on a lawyer, and likely pay the debt back anyway since there is no defense to the action.

So, instead of enduring all of this, some folks consider an alternative like Chapter 13.

Simply put a Chapter 13 Bankruptcy is a repayment plan. Much like a debt consolidation program, you stop paying your creditors and you make monthly payments but unlike the scams, your debts actually do get paid back through a Plan that the Bankruptcy Trustee administers. These Plans run for a commitment period of three or five years depending on your income.  

The process and procedure of Chapter 13 is very similar to Chapter 7. Filers usually hire an attorney and pay a legal fee (sometime upfront and sometimes through the plan, or both), they pay a filing fee to the Court (as of today it is, ironically, $313.00), they take credit counseling and debtor education courses, they have a 341 meeting of the creditors and ultimately receive a discharge.

The main difference is in a Chapter 7, the debtor does not pay their creditors back and in a Chapter 13, they do.

Most often Chapter 13 Bankruptcies are used to strategically stall foreclosure proceedings. If a client is at risk of losing their home and they have exhausted all other options, Chapter 13 can save their home from Foreclosure or buy them some time to gracefully exit their home. This is because as soon as a Bankruptcy is filed an Automatic Stay goes into effect. The word “stay” is just a fancy legal term for the word “stop.” The Automatic Stay immediately stops all collection activity, including Foreclosure. In the Chapter 13 Plan, the homeowner would pay pack the arrearage on the mortgage. But what most folks don’t realize is that during the pending Chapter 13, they must also go back to making monthly mortgage payments. So, sometimes Chapter 13 gets too expensive for people to sustain. Luckily, Chapter 13 is voluntary, and in most cases, if it doesn’t work, the Debtor can simply dismiss their case and move on.