Iowa Bankruptcy Attorney
People facing debt crisis are flooded with options on TV, radio and news print on how to handle their debt issues, and the choices can be confusing. Unfortunately, those in debt can least afford to make the wrong decision, and may be more vulnerable to unscrupulous sales people. This page of the website summarizes the eight most common approaches to dealing with debt. Six of these approaches are "non-bankruptcy options" and two involve seeking protection from the bankruptcy court. We have organized these strategies from what we view as least effective, which are addressed first in this list, to most potent and effective, addressed at the end of the list.
1. The "Ostrich" approach. The least effective of all strategies is to stick your head in the sand and ignore the problem. The dilemma is that this is exactly what most people feel like doing when they are faced with a situation they think is beyond their control. This seems to affect married people more than single people, as singles tend to have more flexibility to quickly change their financial circumstances by downsizing their housing or transportation, quickly identfifying budget cuts, and having more mobility to move to secure new employment. This type of flexibility and quick decision making can be more difficult within the framework of the traditional family unit where the needs of many people are at stake. Different ideas about money, credit and debt issues between spouses, and different levels of debt tolerance add stress to the relationship, often leading one or both spouses to feel paralyzed when debt issues become overwhelming. Getting into marital counseling and budget counseling immediately to identify your differences in thinking, and to create some common goals is perhaps the best counter-attack against these feelings. There is no "right" or "wrong" way to view debt. Some people are very content living with a high debt load (e.g. farmers), while others cannot sleep at night if they carry a small credit card balance from month to month. Neither personality is "wrong," but spouses need to understand and respect these differences, and do their best to support their partner in light of these differences. Finding common financial goals is an excellent way to motivate both spouses to conform their spending habits in a teamwork approach despite differences in debt tolerance. This office is not qualified to provide this sort of marital or debt counseling, but we would be happy to meet with you to go over your issues, and make recommendations of some well-respected counseling resources.
2. Debt Settlement Plans. (CAUTION: AVOID AT ALL COSTS !!!) We debated putting this one first on our list, because not only is it not effective, but it can be more harmful to you than any of the other options you have. These are the companies you see on TV and hear on the radio with toll free numbers to call, advertising that you should take advantage of the "limited-time credit card bailout era" and other deceptive claims. Many of these companies are fraudulent, and seem to be beyond the reach of the FTC, and the Attorney General as they disband and start up new shell companies in places like Florida, California, New York, and Texas whenever they start receiving pressure from consumer advocacy groups. (These companies should not be confused with the highly reputable credit counseling and debt management plan companies that you might find locally here in Iowa, which I refer to later in this list under "Credit Counseling" and "Debt Management Plans.") There may be a few qualified and successful debt settlement companies of which we are not aware, and periodically we hear a success story where a debt is settled, but usually not all of your debt is settled, and usually the debtor has judgments placed against them, leaving the debtor with no other option BUT to file bankruptcy.
The way debt settlement plans work is that the company will ask you to pay a start up fee, then ask you to deposit a sizable amount of money into its escrow account each month. Once their escrow account has several thousand dollars in it, they will contact one of your creditors and offer a 40% - 75% settlement on your debt with that creditor. If the creditor accepts the offer, the company pays the escrow money to the creditor, and takes a percentage of the escrow for themselves for settling the debt. There are two problems with this approach: first, by the time the debt settlement company has paid all of your creditors in this fashion, the accruing interest on the credit cards plus the fee that the debt settlement company charges for their service results in the debtor paying nearly 100% of the original debt, so there is very little benefit (and that is for the small percentage of debt settlement plans that actually work !!).
The second, and more common problem, is that while you are waiting for your escrow account to get large enough to make the settlement offers, the creditors at the end of the list who are not receiving payments or offers to settle become impatient and sue you, and obtain judgments. Then they garnish 25% of your wages, and wipe out your bank accounts, meaning you have no money to pay to the debt settlement company, and you have no choice but to file bankruptcy. Meanwhile, you have lost thousands of dollars in payments to the debt settlement company in start up fees, commissions, and escrow deposits, with nothing to show for it but a disasterous credit score, judgments, and a looming bankruptcy, not to mention the stress and embarassment of getting sued and served by the sheriff with papers.
3. The "Turtle" Approach: This is where the debtor positions his finances in such a way that he or she becomes "judgment proof," which means that creditors have no way to extract money or assets from the debtor through any legal means. The debtor, in essense, becomes immune to the creditors tactics, and buries himself in his protective shell, and lets the creditors fire away at him. This takes incredibly thick skin, and a high tolerance to conflict and aggressive collectors, but our office can help position clients in a manner to become judgment proof, and we can help provide you with strategies to immune yourself if you wish to take this approach. While most do not have the stomach for this approach, it can be effective for the right person and personality type.
4. Workouts: This approach uses the leverage a debtor might gain by threatening to file bankruptcy, and making herself judgment proof, then approaching each creditor individually with a deal that will reduce the amount paid to each creditor to an amount the debtor can afford. The down side is that this approach is more expensive in legal fees than any of the other approaches, and it takes a very competent bankruptcy and commercial transactions team to put a good workout plan together and put it into effect. Often if a debtor has access to cash or financing, it can be quite effective. Installment workout plans are less effective the longer the repayment period. Creditors are sometimes willing to take a substantial discount if they can have their money quickly, even at deeply discounted rates.
5. Budgeting and Credit Counseling: This one is perhaps the most difficult, and requires the most work, but it can also be the most rewarding. There are many excellent resources we can point you toward if you want to pursue budget counseling, and endeavor to create a balanced budget where you live within your means going forward, while paying off your past debt. Even if you elect a bankruptcy option, doing this work of learning how to budget will be essential to help you avoid the same decisions that lead to your current financial situation. This may actually be a two-pronged approach: it may be budget counseling (where you gain the skills and tools to budget effectively) in conjunction with personal counseling or marital counseling if there are personal or marital issues that are contributing to your budget problems. Living a balanced lifestyle impacts all areas of your life, including finances, and achieving balance may be the first step to effective budgeting.
Using the following "Debt Repayment Calculator" can help you determine how much you would have to pay each month, and for how long, to pay off your debt. Enter the total amount of your unsecured debt in line 1 (all debt you have with the exception of home, car, and business loans), and in line 2 enter the average interest rate you pay on your unsecured debt. Some credit cards may be at 7%, others at 12%, and some at 18%, 24%, 29% or higher. Average this out and enter that in line 2. If you do not know, use a number in the 12% to 18% range as this tends to be the average for most credit cards in these types of situations. In line 3 enter the number of years you reasonably believe it would take to repay your debt (or the number of years you are willing to devote to a repayment plan), click the "Calculate" button, and the monthly payment required to repay that debt in the years you specified will appear in line 4. You can re-do this calculation as often as you like, changing the base assumptions of interest rate, and the length of your repayment plan to see how that impacts the amount of your monthly payment.
6. Debt Management Plans: There are local companies in Iowa that are very reputable and highly skilled and trained at setting up repayment plans with your creditors where your interest rates are reduced, and you pay a set amount each month. The monthly fees you pay to these companies are very low, as they are supported by grants, donations, fundraisers, and "fair share" fees that creditors pay to them for helping recover the debt for them, which means that a very high percentage of what you pay into the plan goes toward lowering your debt. Debt management companies strive to put you in a plan that will eliminate, or greatly reduce your debt, within five years. If you have too much debt compared to your income, then Chapter 13 or Chapter 7 bankruptcy will be your only options at that point (see below). One draw back to these plans is that creditors are not forced to adhere to the plans that the company proposes, and a stray creditor could still sue you, get a judgment, garnish your wages, levy your bank accounts, and destroy the plan, but that scenario is much less likely in these plans where all creditors are receiving something every month, contrary to debt settlement plans where all but one creditor is ignored.
Another draw back to either of these two approaches (Budgeting, Credit Counseling and Debt Management Plans) is that it may take too long to repay the debt. For example, if you have $50,000 of debt and you pay $500 per month toward it at 7%, it would take you 12.5 years to repay the debt. At 12%, you would never repay the debt because the monthly interest exceeds $500. Using the "Debt Repayment Calculator" above you can determine how long it would take to pay off your unsecured debt.
7. Chapter 13 bankruptcy: This is basically an affordable, court-ordered debt management plan, with teeth, where creditors are forced to accept it, which lasts only 3 - 5 years. The attorney for the debtor helps prepare a budget for the court to review, and proposes an amount to pay each month to all creditors, many at zero % interest. It is an amount the debtor can afford, and after 3 - 5 years the payments stop, and most remaining unpaid debt is discharged or eliminated. Some debts like child support, taxes, and student loans cannot be eliminated, but most remaining unsecured debt is eliminated. Secured debts on homes and cars can be eliminated if the debtor wishes to surrender the asset secured by the debt. A debtor might pay 5% of his debt back during this time, or 100%. It all depends on the budget that the debtor and attorney create based on income, expenses, and certain guidelines, rules and laws. Chapter 13 is perhaps more powerful than Chapter 7 in many regards in that it can protect co-debtors, eliminate second mortgages in some instances, force a mortgage company to stop foreclosure and give the debtor five years to catch up on the loan, and it can allow debtors to pay back car loans to the extent of the value of the car, and eliminate the portion of the loan that exceeds the value of the car if the loan is more than 2.5 years old. Chapter 13 is available to almost anyone, no matter how high the income, and it can be used even if someone recently was in bankruptcy. For debts that cannot be discharged in bankruptcy, a 5-year Chapter 13 plan can very effective in managing this debt through affordable monthly payments, and can be an effective way to deal with IRS debt, student loan collections, and helping manage your debt load while making child support and alimony payments. Although child support and alimony payments cannot be reduced or adjusted through bankruptcy, your other debts can be, helping you free up enough available cash to stay current on child support and alimony.
8. Chapter 7 bankruptcy: This is the most popular form of bankruptcy in Iowa, and perhaps the most powerful. While it does not have some of the weapons in its arsenal that a Chapter 13 has with respect to stopping foreclosures, curing mortgages, cramming down car loans, stripping liens, and protecting co-debtors, it does provide debtors with a clean slate in a very short period of time. Debtors can eliminate unsecured debt without a repayment plan. The debtor is protected from creditors on the first day the bankruptcy petition is filed. In most instances, the case will be open for about four months, during which the debtor cannot be contacted by creditors. At the conclusion of the case the debtor will receive a "discharge" meaning that most unsecured debts will be eliminated (with some exceptions such as taxes, student loans, fines, penalties, and domestic support obligations like child support). Debtors have the option to eliminate or keep secured debt, depending on whether they want to keep the asset secured by it or not. For example, if the debtor wants to keep his car, he will have to repay the car loan that secures the car. If the debtor is willing to surrender the car, he can eliminate the car loan and avoid repaying it. Another advantage to a Chapter 7 is that it is generally less expensive than a Chapter 13, and it is much less expensive than any of the other options presented on this list.
Return on Investment: By far the best return on your investment is to file bankruptcy. It is far cheaper to file a bankruptcy than it is to repay interest on debt year after year, without making any gains. But, not many people realize that bankruptcy offers the best return on investment anywhere, on any investment. The average cost of a bankruptcy in Iowa is anywhere from $1,400 (attorney fees and court costs) to $3,000. Assuming a person invests $1,500 into their bankruptcy, and eliminates only $15,000 in debt (a very low discharge amount for most cases), that person will achieve a 1000% return on investment in just four months, because they will be financially ahead by $15,000 for only a $1,500 investement. A good mutual fund or blue chip stock might give you a 7 - 10% return annually. It would take 40 - 50 years for your $1,500 investment to match what we can accomplish in just four months. Considering most people eliminate $30,000 - $60,000 or more in debt with their bankruptcies, the rate of return is usually closer to 2000% to 4000%. Is there any investment, anywhere, that could turn $1,500 into $60,000 (or more) in just four months? Nothing is more powerful than investing in your future, and the future of your family, by securing a clean slate, and making a fresh start.
But am I eligible for bankruptcy?: Almost everyone is eligible for bankruptcy, including the very wealthy. The only question becomes which type of bankruptcy is best for you. Some of the wealthiest people and corporations in the world use bankruptcy as a tool to reorganize a temporary financial set back resulting from uncontrolled circumstances. The power of this law is available to everyone, and our office will help you use it to your benefit. Creditors have used laws to make a lot of money off of borrowers. Bankruptcy laws are in place to make sure that those unable to pay have a minimum level of protection, so they can become a thriving, active member of our local economy once again, able to spend money, distribute wealth, take risk, start businesses (i.e. spur our economy), which will benefit everyone, most of all, you and your family.