Getting Rid Of Myths and Distortions

Getting Rid Of Myths and Distortions

This is an abbreviated form of what we discuss at the primary consultation. Of course, each person is different, and you should confirm these things with the attorney.

DAVE RAMSEY IS A CREATIVE MONEY MAKER WITH SELECTIVE MEMORY

Financial “guru” Dave Ramsey says that he is against Bankruptcy. If fact, he makes quite a bit of money offering “solutions” that are meant to avoid Bankruptcy. The truth is a bit more revealing.

THE TRUTH ABOUT “OTHER” OPTIONS

The old saying goes, “If it sounds too good to be true, it probably is.” If people would use this advice and carefully think about these other “options,” then fewer people would fall prey to them. Put yourself in the creditor’s shoes—if you give in and lower payments or agree to lower debt, then who would ever pay you on time or in full?

CREDIT COUNSELING/DEBT MANAGEMENT

This is the program that supposedly combines your bills into one payment, and the operator forwards your payments to the lenders each month. Put yourself in the lender’s shoes. If you lend money, you need your FULL payment back each month—getting part means you lose money. So, if the program really works the way the operator makes it sound, then everyone should call the operator. But, if that happened, the lender would go out of business.

1. So, the reality is that most people do not get a workable plan:
   
   
   1. Many lenders won’t accept the payment plan or require a higher payment;
   
   
   2. Many lenders back out over time because there is no contract binding them to the program; and
   
   
   3. The lender is free to account for the money differently than the credit counselor shows. It is possible to owe thousands of dollars years later.
   
   


2. A second problem is that the program will severely harm your credit (call a car dealer or mortgage company and ask them).
   
   
   
   1. The “fine print” in the credit counseling agreements shows it harms your credit.
   
   
   2. The ads say things like “we help you avoid bankruptcy” or “we are an alternative to bankruptcy.” Avoiding does not mean better—you can avoid the right thing and do the wrong thing. Your can be an “alternative” and be worse.
   
   
   3. Credit counseling provides no immediate debt-to-income ratio improvement. Bankruptcy wipes out a great deal of debt very rapidly. About 30% of your credit score comes from your debt-to-income ratio.
   
   
   4. Bankruptcy kills the reporting of bad debt so that your bad debt ages. As it ages, it’s impact on your credit eases. In contrast, with credit counseling, you are actually feeding the negative entries—each payment is not the correct amount and results in the bad credit following you and suppressing your score.
   
   
3. Most of these “non-profits” are actually tools used in debt collection. Please see the attached article from the IRS.

DEBT SETTLEMENT/DEBT REDUCTION

Many of these ads are misleading. They sound like “consolidation,” but they actually involve a subtle misdirection of collection efforts. First, the common-sense part of this explanation: a lender loans money so that it can be repaid in full. Paying part does not work. So, if you really could borrow one amount but only repay a fraction, why would anyone ever repay the entire amount? It is too good to be true.

The basic/typical pattern of contact is as follows:

1. Borrower gets solicitation that looks like this is some sort of consolidation.
2. The entity offering the service is actually a law firm.
3. By “retaining” the firm, the calls stop.
4. The borrower/debtor assumes that a miracle has happened and happily sends more money
5. The first several monthly payments to this firm are the firm’s fee to represent the borrower
6. Several months into the program, the borrower/debtor realizes that the letters from lenders are getting more hostile and that the bills show that none of the money went to the lenders yet.
7. A call to the firm confirms that the first few payments made up the firm’s fee. The borrower/debtor is now told to wait, absorb the contacts from the lenders, and the firm will TRY to settle—no guarantees.

The problems:

1. The lender only settles once the borrower proves that the borrower will not pay (otherwise, everyone would settle). This takes a very long time. In the mean time, lenders can sue the borrower and seize assets after the judgment is entered.
2. The credit score looks worse than a bankruptcy score within the first year.
3. The settlement itself is a negative on credit—you did not pay the lender in full.
4. After the settlement, just as your credit begins to improve, the lender does a “charge off” of the remaining, unpaid balance. Reporting this on your credit brings your score back down.
5. The lender then reports the charge off to the IRS, and you receive a 1099-C. You owe tax on what you did not pay. BANKRUPTCY AVOIDS THIS.

BAITING THE CREDITOR/TAKING ADVANTAGE OF “LEGAL” OPTIONS

There is something called the Fair Debt Collection Practices Act (“FDCPA”). Some companies/law firms try to use the FDCPA to “bait” creditors into violating the law. If the creditor does, then you MIGHT be able to reduce or eliminate the debt as part of their program. The problems with this approach are immense:

1. You are forced to be a victim of creditor contact while the company/law firm monitors creditor contact. While a collector MIGHT violate the FDCPA, there is no guarantee that the collector will. Further, if you have multiple lenders, there is little chance that ALL collectors will commit the same mistakes.


2. Your credit will suffer while this happens. Make no mistake, while you are suffering through this process, the lenders report bad things on your credit.


3. Ultimately, if the collectors don’t violate the law, you have wasted your time in the process.


4. The company/law firm will then try to settle the debts for you (see the section immediately before this section).


5. In the end, a simple reading of the disclosures reveals that the initial entity that contacted you was nothing more than an entity that generates “leads” for these law firms. In other words, you were hooked by clever advertising into selecting a company/law firm that did not generate the ad. Please see the attached disclosure.


6. The initial company you contact takes no responsibility for the conduct or service offered by the law firm that gets your name. THERE ARE NO PROMISES AND NO GUARANTEES made by this company.

FREQUENTLY ASKED QUESTIONS CONCERNING THE VARIOUS OPTIONS

1. How long will it take before I can go to a major bank or other reputable lender and qualify for a loan that does not have excessive rates or fees?

2. How much is repaid to my general, unsecured creditors?

3. Will I owe income tax on the amount of debt not repaid (i.e., on the amount of debt discharged by the Bankruptcy or forgiven/canceled by the creditor)?

4. Is there a certain, legally binding result?

CHART COMPARING THESE OPTIONS

IT IS ILLEGAL TO BASE HIRING AND FIRING DECISIONS ON A BANKRUPTCY FILING

IT IS ILLEGAL TO DISCRIMINATE IN MAKING STUDENT LOANS IF THE BORROWER FILED BANKRPUTCY