If your family is anything like mine, you have a lot of debt. Generally, if monthly debt retirement exceeds two-thirds of monthly income, that’s too much debt to pay off. These families can run on the debt treadmill for a few months. But the treadmill goes faster every month, and eventually, the pace is too fast.
This amount includes secured debt, like a mortgage payment, and unsecured debt, like credit card bills. The 64 percent threshold also covers current and past-due debts. Note that credit card minimum payments are not “debt retirement.” These payments don’t affect the UPB (unpaid principal balance). They just buy a few more months on the aforementioned treadmill.
Generally, bankruptcy is the best option in these situations. But not everyone qualifies for bankruptcy, especially Chapter 7. Bankruptcy-phobia, which is an unreasonable fear of filing bankruptcy, is a much bigger issue. It’s almost impossible to convince an acrophobic (fear of heights) to climb a ladder. It’s much better to offer this person an alternative.
Card players bluff to win poker hands, and attorneys bluff to obtain favorable debt settlements. A creditor doesn’t know if a debtor doesn’t qualify for bankruptcy or has a bad case of bankruptcy-phobia. An implied threat to file bankruptcy may be as good as the real thing.
Almost everyone has at least a mild case of bankruptcy-phobia. For decades, banks have told people that bankruptcy ruins your credit, is humiliating, and does other terrible things to your family. These myths are untrue. But that’s the subject of another blog.
Creditors, especially unsecured creditors, get the short end of the stick when customers file bankruptcy. If Rex falls behind on credit card payments and he files bankruptcy, the bank typically gets nothing.
Therefore, banks are highly motivated to make favorable pre-bankruptcy deals. Something is almost always better than nothing.
This hardline approach often works. Sometimes, however, you catch more flies with honey than you do with vinegar. A kinder, gentler approach may be more effective. Debt settlement lawyers, who are excellent negotiators, know when to make veiled threats and when to play nice.
Debt discharge, like credit card debt discharge, is usually only available in bankruptcy. So, a debtor shouldn’t expect non-bankruptcy debt negotiation to produce a similar result. Nevertheless, there;s usually a pot of gold at the end of the rainbow in these situations. The pot isn’t as big because the debtor didn’t go all-in and file bankruptcy.
Almost all loan terms are negotiable. Favorable outcomes, like interest rate reduction, are usually available. A slight reduction could mean thousands of dollars per year. Payment date is another example. A day or two could make a big cash flow difference.
Other possible relief includes partial UPB forgiveness and late payment accommodations. Partial UPB forgiveness is usually a long shot, but late payment deferral is pretty realistic.
Druong debt settlement negotiations, bankruptcy is often the ace in the hole, to return to the poker analogy. Lawyers can often jump over eligibility hurdles. Furthermore, bankruptcy-phobic individuals usually warm up to the idea if everything else has failed.
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