This page explains general principles relating to complex legal matters. For the best course of action in your particular situation you should consult an attorney familiar with specific provisions of the law.
People in financial distress have four basic options to consider.
Do nothing. Some folks who cannot pay their debts are protected because all of their income and assets are exempt from creditor claims.
While “doing nothing” may be a permanent solution for some, for others – such as the temporarily unemployed – it may only be an interim answer to financial distress. Meanwhile, state and federal law can provide some protection from undue harassment by collectors seeking payment of consumer debts.
Solve the problem outside of court. If a person’s financial problems are the result of only one or two debts then the best solution may be to work directly with each creditor to reduce or refinance those obligations. (Debt forgiveness outside of bankruptcy may be a taxable event. So persons seeking a reduction in debt should consult with a tax adviser to avoid unpleasant surprises at the end of the year.)
For a person with more complex financial issues the wisest approach is often to present a general plan to all of the creditors. A carefully chosen credit counselor may be of assistance in this process (avoid debt settlement companies). For folks in western and northern Wisconsin we recommend Family Means and Catholic Charities. For home mortgage issues we suggest the Homeownership Preservation Foundation.
Other alternatives include borrowing against home equity or drawing on retirement funds to pay off creditors. These are very dangerous “solutions” because they do nothing but shift the financial burden from the present into the future. Unless the debtor can expect imminent and significant financial improvement, the result will almost always be even greater economic distress down the road.
Do a state court repayment plan. If creditors will not voluntarily accept a repayment plan then an individual can ask a judge to force them to accept repayment over three years under a “Chapter 128” proceeding. However, this approach does not work with some creditors, including “secured” creditors to which the borrower has granted a lien on the borrower’s property.
File for federal bankruptcy protection. Although those in financial distress should consider bankruptcy to be their last option, if debt repayment is unlikely then a bankruptcy may be the best choice. For more about the bankruptcy option, click here.
Contact us for a debt relief consultation to determine the best course of action in your particular situation.
Freund Law Office is a debt relief agency. Among other things, we help people file for bankruptcy relief under the Bankruptcy Code.