Q. I am in debt over my head. Bill collectors phone all day. Do I
have to file bankruptcy?
A. No! Consider a debt workout instead of bankruptcy whenever possible.
Q. What is a debt workout?
A. Generally this occurs when an attorney contacts your creditors and makes
arrangements which would require you to make some payments to them, although
less then what they may be owed to settle the account in full. Other times arrangements call for payment
in full but over a longer period of time than originally planned. Sometimes you can even pay a smaller settlement figure and make payments over time.
Q. Why would creditors do this?
A. Most debtors in workouts classify as candidates for bankruptcy. If a
bankruptcy filing would occur the creditors would likley end up with little
or nothing. By doing a workout they get more than they otherwise would.
Q. Why do I need an attorney?
A. Would you fly an airliner with your family on board if you didn't know
how? Workouts or bankruptcies will be actions that will affect you for
many, many years. They should not be taken lightly or handled by the inexperienced.
This includes the lawyer. Do not choose a lawyer unless he or she handles
these types of cases often. Even then, make sure you share their attitude
and philosophy about these cases and it makes you comfortable.
What should I watch for?
A. Many lawyers quickly file for bankruptcy without attempting to fully
understand your financial or lifestyle situation.
Make sure someone takes the time to understand YOU. Then explore all options
including bankruptcy, paying
creditors in full, doing nothing, and debt
workout.
Q. What makes a workout better for me?
A. A Chapter 7 bankruptcy remains on your credit report for 10 years and
may have to be reported on financial statements even longer. A workout
allows you to avoid the emotional and credit scars caused by bankruptcy.
For those with hard assets, such as real property,
a workout allows you to retain greater control and increase the likelihood
you may keep your assets if that is your wish. Workouts even help to keep
or control soft assets such as cash.
Q. I've missed mortgage payments and a foreclosure letter has arrived,
what can I do?
A. Many ways exist to keep property through a workout. Of course, the sooner
the problem can be dealt with the more likely it can be cured. I have seen
clients years behind in mortgage payments. A workout for someone only a
few months behind bares more chance of success. Below I've listed several
ways to save a property through a debt workout:
Q. You just mentioned deficiencies, I've heard of those could you
explain them?
A. When you sign a promissory note to pay $100,000 back to the bank for
money loaned to you for a home purchase it means you owe them $100,000.
If five years later you are foreclosed on and the bank gets $90,000 at
the sale you still owe them $10,000 more.
Q. What happens to this deficiency after the foreclosure?
A. Most times it becomes unsecured debt.
Q. Can unsecured debt be worked out?
A. Yes. The two most common ways to workout unsecured debt are paying it
off in a lump sum at a discount or establishing a long term payoff plan. This goes for
unsecured debt such as credit cards too.
Q. How about figuring a discount and then doing a payment plan?
A. The best chance for settlement if you want a discount from a creditor
will pay them all cash at the time of settlement. Some plans may give you a few months. I work with one agency, staffed by attorneys, who frequently negotiate discounted settlements on credit card balances over a few years. (To explore this option go to the pre-qualification questions page and submit a free short form evaluation request.)
Q. It sounds like I need cash for a workout, where do I get it?
A. Most times I see it come from relatives , friends, loans from employers
or from retirement plans, money saved when not making mortgage payments,
or a loan on hard assets. Settlements over time use money from ongoing earnings.
Q. Who would give me a loan now?
A. Many companies business' revolves around making just these types of
loans, Expect a lower loan to value ratio, higher interest rates and large
up front fees. A list of firms making home mortgages to debtors with credit
problems may be found at the Alternative
Mortgage Sources USA site.
Q. What if I just can't get cash anywhere?
A. Sometimes this becomes a case where doing nothing
for a while is the correct option.
Q. Why doesn't everyone workout their debt at a discount?
A. First, a creditor only does a workout to benefit themselves. There must
be a substantial chance they would end up with even less if they refuse
to work with you. Second, your credit will suffer.
Q. Do I have to be on the verge on bankruptcy for a workout?
A. No, I've seen them done for millionaires, but they can be much more
difficult, the terms not as favorable, and the underlying principal that
the creditor must come out ahead still prevails.
Q. How does it work when a debtor has substantial wealth?
A. In most cases the debtor has a large portfolio of good assets with one
in trouble, usually investment real estate for which they have signed a
note with a personal guarantee. Imagine they have been supporting the bad
property for years and have had enough. They may buy back their guarantee
at a discount or give the bank a deed in leiu of foreclosure with a plan
to pay only some of the deficiency.
Q. Why would a bank do this?
A. "Time value of money" is very important to a bank. A smaller
amount in their pocket today has more value than a larger sum years down
the road. Settlements may also avoid steep legal fees.
Q. How does a bank figure settlement prices?
A. This can be very complicated and differ based on bank accounting and
philosophy.
Q. When do workouts become more cost effective than bankruptcy?
A. It depends somewhat on the type of workout and who negotiated it, but
the most important factor will be the asset itself.
Q. What percentage can a note be negotiated down to?
A. The best answer to this question is the note does not matter much, the
value of the asset means so much more. I've seen some notes settled for
less than five cents on the dollar and others not settled for less than
a full dollar on a dollar.
Q. How does the asset come into it?
A. Take two recent examples. Case 1:A house with a $240,000 first mortgage
and over $2,000,000 in blanket government liens. The house was valued at
$155,000. The first mortgage settled for $117,000, the government agreed
not to take a penny. The loses where large, but justified. Case 2: A couple
had a house worth $50,000 and a mortgage of $12,000. Even though they had
over $70,000 in unsecured debt it didn't matter. The first mortgage holder
would not write off any money at all, nor did I expect them to.
Q. I can mix and match what I keep if I have several properties?
A. If you can negotiate it. I've even seen it done with multiple debts
owed to one creditor. In fact, unless you file for personal bankruptcy
you can mix all of the debor's options among your various obligations.
Q. Will you give me an example of that?
A. Take a large asset portfolio item by item. One partnership can not be
worked out, this one partnership files for bankruptcy. Four properties
settle through workouts. Some trade creditors have never been heard from,
nothing gets done for them. In order to keep a credit card, one is paid
in full.
Q If I try a workout that fails can I still file bankruptcy?
A. Yes, all options will still be available.
Q. How does a workout look on my credit report?
A. It depends on how the creditor reports it. They could say nothing or
report it as paid at a discount or a paid charge off depending on what
happened. These marks are bad, but not as bad as a bankruptcy or ignoring
the problem. You can rebuild your credit in a few years. Depending on how bad your credit was before the debt workout a settlement to avoid bankruptcy can make it better than it was.
Q. Are there tax consequences of a successful workout?
A. Sometimes a creditor will send a 1099 statement for the amount they
have written off. The government calls this forgiveness of debt income.
You must report this on your taxes. Most people I deal with then use the
exception in the tax law that if you are insolvent before the forgiveness
and insolvent after the forgiveness that you do not have to pay tax on
it. You should, however, report it and fill out the proper forms if you
get a 1099 from the creditor.
Q. What types of debt can be worked out?
A. Almost all debt can be worked out depending on the asset values. Government
backed student loans come up as one of the few exceptions, even here fees
and interest only may be negotiated. Remember that a bankruptcy won't discharge
student loans either unless there exist special circumstances.
Q. Can I pay back the rest of the money later?
A. If you want to there is no law against it, but it may not help your
credit report and I'll bet you have better uses for it than the creditor
does.
Q. Do I have to deal with all of my debt at once?
A. You should have a master plan, but that plan may include dealing with
the creditors one by one over a years time.
Q. Explain the disadvantages of a workout.
A. If your credit has not yet been scared a workout may be reported almost
as adversely as a bankruptcy. The most common detrement for this option
becomes free cash. It may sound great to settle $50,000 of credit card
debt for $25,000 and you may be thrilled to do it, but if you don't have
$25,000 it can't happen. On top of this you will have to pay fees to whoever
negotiates the workout, so the whole process may be more cash intensive
in the short run. A example comes to mind of a house with mortgages, arreages
and legal fees of over $90,000 due. Negotiating the mortgage debt down
to $32,500 cost $2000-$3000, but the trasaction fees to borrow the money
rose to over $10,000 because of unique circumstances. Yet even with these
figures it saved the debtor hundreds of dollars each month from their new
payment and the equity position in their home increased by $45,000 over
night.
Q. How do I pay for a workout negotiation if I can't pay the creditors
now?
A. If the mortgage company has stoped taking payments use that money, or
use the money earmarked for making the minimums on your credit cards to
fund the workout. If cash flow seems tight be sure to read "Who
to pay when you can't pay everyone."
Q. Where can I get help for my own personal situation?
A. If you currently have trouble with mortgage payments try our interactive foreclosure prevention help tool. For other debt problems you might try to learn more about options and view the prequalification questionaires at fix-debt.com or use a form to hear from professionals providing various debt solutions and decide on the best plan after hearing what they each have to say.
For information on retaining or consulting with Attorney Brenner please visit the contact page.
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