debt settlement

Clients’ Choice Award – I’d like to thank . . .

As a CERTIFIED FINANCIAL PLANNER™ and bankruptcy lawyer, I rescue clients from financial chaos. I solve debt problems caused by job loss, ill health, and other life-changing setbacks. For so many with too much debt and too little income, I help them push the RESTART button.

After examining spending patterns, budgets and monthly income, we consider all debt-relief options including payment plans, debt settlement, and bankruptcy.

A Chapter 7 bankruptcy is designed to protect property and give a financial fresh-start. My clients feel immediate relief after I file their case and debt collectors stop calling. 90 days later, the case ends and financial freedom begins.

Many are surprised to learn how Rhode Island and federal law can help protect most/all of their property. These “exemption” protections apply to cars, real estate, retirement assets, jewelry, etc. Most clients do not lose any property at all.

These same laws also help remove most unsecured debts like credit cards, payday loans, utility bills, personal loans, lines of credit, medical bills, car repossessions, mortgage foreclosures, etc. Sometimes, even income tax obligations can be discharged in bankruptcy.

I understand its not easy to ask for help, especially when it comes to money-matters. I get it. That’s why I designed my practice differently.

Anyone with a debt problem can call me, without any obligation, to get my advice. I’m pretty easy to talk to and would be happy to help you determine the best path out of your debt dilemma.

Hit the Avvo badge below where clients generously shared their experience in working with my firm.

PS: I don’t take these “awards” too seriously, but I’m always happy when clients appreciate the realized benefits of a financial do-over.

Here it is.

Debt Settlement Plans: Part II

You’ve tried calling each credit card company to work out a debt settlement plan, but they aren’t interested. Interest rates have only skyrocketed in the past year. The bills keep coming and you are drowning in debt.

What if your “minimum payments” on credit cards add up to $ 1,000 a month? Few debtors can honestly afford repaying such a high amount without using other cards for their daily living expenses. It becomes a game of robbing Peter to pay Paul.

It would seem like a miracle for a “credit counseling” company to get your payments down to $750 per month by decreasing your interest rates. Who wouldn’t want to save $ 250 a month? Although saving $250 per month may sound good at first, here is the bigger question. Do you honestly even have the $ 750 available?

If you can only afford $300 a month, a plan that requires you to pay $750 per month will not do you much good. You are still in debt. For this reason, “credit counseling” companies and “debt management” companies focus exclusively on the amount of savings they offer, rather than whether you can actually afford your payments. Many clients who ended up filing bankruptcy in Rhode Island wasted thousands of dollars on unrealistic repayment plans first.

Added to the misleading nature of “debt management” company claims are hidden fees and fraud. Consumer Reports claims that

” Many [“debt management” companies] advise rolling high-interest debt into a second mortgage. But by using your house as collateral for what was unsecured debt, you risk losing your home. Some firms can persuade creditors to cut your debt. But if you miss payments they can later back out of the deal and demand full payment, potentially landing you in bankruptcy court after you’ve already paid a large portion of your debt.” Consumer Reports online report, June 2005.

Filing Chapter 7 bankruptcy offers a straightforward, honest, effective alternative to the misinformation propagated by “debt management” and “credit counseling” companies. Federal bankruptcy laws were created by Congress for the purpose of helping hardworking citizens pay off their debts. Unlike DMPs, bankruptcy actually reduces both interest and debt. In fact, bankruptcy is the only way to completely eliminate a debt.

Bottom line: Before you look into signing up for an unrealistic debt management plan, consider consulting a qualified Rhode Island bankruptcy lawyer.

The Truth About Debt Settlement Plans: Part I

Is debt settlement a realistic option? As a Rhode Island Bankruptcy lawyer, I get calls daily from families who are struggling with excessive credit card debt. If the credit card debt is less than $ 8,000, I rarely suggest bankruptcy as the solution, unless there is additional non-credit card debt that makes debt repayment impossible.

In every debt consultation, however, I ask what other solutions have been attempted to repay debt. Then the stories of debt settlement attempts and debt management plans begin. Many have paid large sums of money to finance a debt settlement plan that failed. Hundreds and thousands of dollars were wasted on unrealistic plans that were doomed from the start. Why does this happen to so many people?

The term “debt settlement plan” is a misleading one. Most of the Rhode Island advertisements I have seen for this kind of debt settlement plan—whether on the internet, on television, or in phone books—are placed by “debt management” companies, also known as “credit counseling” companies. Despite their name, most of these companies only aim to get you to sign up for what they call “debt management plans” (DMPs) and do not give actual advice on credit. What you might not know is that credit card companies sponsor DMPs in order to collect money from you. In essence, then, “credit counseling” companies serve as bill-collectors for credit card companies.

The debt settlement advertisements run by these “credit counseling” companies are misleading as well. For example, when ads claim that DMPs will “reduce your debt by 60%,” they may lead you to believe that they will actually reduce the amount of your debt. However, the most a “credit counseling” company can do is reduce the interest on your credit card—and not by much. In reality, you still must pay your entire debt along with most of the interest. Ultimately, “debt settlement” plans do anything but do away with your debt.

Additionally, when setting you up with a “debt settlement plan,” “credit counseling” companies often fail to take all your expenses into account. This is usually because the plan they offer you is far more expensive than what you can afford to pay. Thus, although they promise to eliminate debt, DMPs do not bring you any closer to making ends meet. In fact, almost 90% of DMPs tank before completion. All said and done, the hope offered by DMPs is nothing but a scam—lowering the interest rates on your credit card by a few points is far from a financial fix.

What’s worse, “debt management” plans actually damage your credit. As part of an arrangement called “fair share,” credit card companies are paid a percentage of the amount that the “debt settlement” company collects from you. Thus, the more you pay a “debt settlement” company to get yourself out of debt, the more of your money goes to pay off the credit card companies. And as long as these companies can continue to milk you, they will—regardless of whether you can afford your plan or not.

One Caveat: For those who only need help with budgeting, and have a modest amount of debt that can be reapaid comfortably in 24 months or less, I am the first to recommend a call to a local office of Money Management International.

Rhode Island Bankruptcy Law: Myths vs Reality

Who files bankruptcy in Rhode Island and why ?

Recent studies show that since 2008 the number of bankruptcies filed by those making more than $60,000 per year has increased by 6.9%. With filings up 36.5% from what they were this time last year, many blogs and commentators are labeling America’s current economic condition a recession for the middle class. I can say that this is true for Rhode Island as well.

Many myths surround bankruptcy. One of these myths is that filing Chapter 7 is just an “escape route” for the financially irresponsible. Another is that filing Chapter 7 is only what truly poor people do. These bankruptcy myths , however, are easily refuted.

In fact, the economic recession has hit the Rhode Island real estate profession particularly hard. Today, more and more real estate developers and real estate agents are filing for bankruptcy protection due to the collapse of the housing bubble in the Ocean State.

Rhode Islanders have two basic bankruptcy options

Different kinds of bankruptcy exist for specific situations. For instance, Chapter 7 bankruptcy is usually filed by unemployed workers, or those whose income dropped due to loss of overtime. Chapter 7 filers must show that their gross income during the prior 6 months is lower than the median income of other similar sized Rhode Island households. Although a Chapter 7 bankruptcy erases most debts, it limits the amount of property a debtor is entitled to keep.

Because the RI and Federal exemption laws protect a vast array of property, very few Chapter 7 debtors lose any property in the process. Put your fears to rest by contacting a qualified Rhode Island attorney. He will explain what property can be protected and what cannot. In most cases, you will lose nothing.

If you have alot of property, and are unable to protect all of it in a Chapter 7 filing, a Rhode Island Chapter 13 bankruptcy allows you to pay equity above available exemptions to unsecured creditors. That way, you can keep your property if you can afford to do so. Chapter 13 creates a three to five-year payment plan for people who still earn a living (or have some regular source of income.) The payment plan consists mostly of secured debts such as car and mortgage payments. Also, unlike a Chapter 7 bankruptcy which requires up-front payment for attorney fees, Chapter 13 attorney fees can be part of the payment plan.

Debt-Settlement Scams and Tax Consequences

A word of warning to those considering debt-settlement firms instead of filing for bankruptcy: don’t. Although many debt-settlement companies pose as credit-saving alternatives to bankruptcy, most end up doing more harm to your credit than filing for bankruptcy would. This is because creditors will continue to report your missed payments to credit bureaus—even if you are in a “debt-settlement” program.

Also, settling debt for less than the full amount owed will trigger a 1099 statement reported to the IRS. In other words, you are walking into a tax liability. Interestingly, bankruptcy has shown to improve most client’s credit scores. It does so by stopping negative reporting and immediately improving your debt to income ratio.

Another problem with debt settlement firms is that they are subject to very little regulation. Debt settlement firms demand payment up front before all debts are settled. This means they have little incentive to settle a debt completely after they have already been paid. In short, “debt settlement” is far from guaranteed. Compare this with bankruptcy, an organized legal process with pre-defined results.

Timing is key when considering filing bankruptcy in Rhode Island. You must be careful to not file bankruptcy too early or wait too long. Instead, start by calculating your debts and estimating what it would take to pay it off on your own. If the amount is too large, or would require you to sacrifice your family’s basic needs to make a dent in your debt load, then consult an experienced consumer bankruptcy attorney.

If you have missed even one mortgage payment, car payment, or credit card bill, you need advice now. You don’t need to wait for your car to get repossessed or your mortgage to get foreclosed. Use your head, remain calm, and remember that bankruptcy is powerful and can restore order to a financial mess.

RI Bankruptcy Law: Discharge vs Debt Cancellation

RI Bankruptcy law is complex. If you are drowning in bills, make sure you understand the difference between cancellation vs discharge in bankruptcy. If you make the wrong decision, you may end up with a large income tax obligation.

First, what is debt cancellation? Debt cancellation is when a a creditor loses hope of ever getting paid. For business reasons, they decide to stop chasing you. They may decide to sell your account to a collection company for a few pennies on the dollar, but they are essentially “writing you off.”

For the debtor who has been pursued for collection, a creditor’s decision to cancel the obligation may sound like good news. What’s not to like about a quiet telephone and no harassing bill collectors?

Here is the bad news. When a creditor cancels your obligation, they often file a Form 1099-C (Cancellation of Debt) with the IRS. The canceled amount is then treated as regular income. In other words, you are about to get hit with a big tax obligation.

This is the last thing a person struggling with bills ever thinks about when calling a debt settlement company. “You mean to say, I can settle my credit card bills and still end up owing the IRS?” Yes! It reminds me of the famous movie line, “just when I thought I was out, they pull me back in.”

Imagine successfully negotiating the cancelation of $ 50,000 of debt. If you are in the 25% income tax bracket, you could end up owing $ 12,500 in income tax. Not good.

A bankruptcy discharge under RI Bankruptcy Law, however, is much more powerful. According to the United States bankruptcy code, discharged debts are NOT the same as canceled debts. A discharged debt is not treated at taxable income. Very good.

But what happens if a creditor files a Form 1099-C on a debtor who has filed for RI bankruptcy relief? While this should be confirmed with your CPA, the solution is found in IRS Form 982. This form should negate the usual effect of a 1099-C. In other words, Form 982 allows a debtor who has filed for bankruptcy relief, to exclude from gross income the debt discharged in bankruptcy. It will not be treated as taxable income.

As you consider how best to solve your present financial dilemma, be very skeptical of any debt settlement company promising to make your creditors “an offer they can’t refuse.” In many cases, you will be walking yourself into an income tax nightmare. Don’t pay anyone to help settle your debt without first understanding the protections available under RI Bankruptcy law. Bankruptcy law is just more powerful.

(As a footnote, the Mortgage Debt Relief Forgiveness Act of 2007 may absolve a homeowner from paying income tax on canceled mortgage debt if it is on their primary residence. While this law won’t prevent a bank from suing you for default, it will make the canceled mortgage debt a non-taxable event.)