Bankruptcy Alternatives (There Are Risks) | Law Offices of John T. Orcutt

Bankruptcy Alternatives (There Are Risks)


  Credit Counseling Plans: Top 11 Things You Need to Know.

Complete Guide to Bankruptcy

Bankruptcy Alternatives


Budgeting is the first step in getting your finances back in order. However, more than one-third of all Americans report that they do not use a budget to manage family expenses. By understanding your household income and expenses, you can make educated financial decisions. People who make a budget for the first time are shocked to see how much they spend in various areas. By tracking these expenses, you are often put face-to-face with a painful reality: you are spending more than you earn. In our experience, people would rather do almost anything than sit down and work on a budget. Sitting down with a pencil and paper and working out a budget is the only way to find out where your money is going. The reward of budgeting is that you may be able to see your problem and fix the issues.

Increase Income

You finished your budget, separated need from want, and done everything possible to lower your expenses and live on less. Yet, you don’t want to give up your house or apartment because it is in a good school district for your kids. You don’t want to give up your nice car or drastically change your lifestyle. You worked hard for what you have and want to keep it all. However, if your expenses still exceed your income, what do you do? The only solution is to earn more income. That might mean changing jobs, getting a second job, working overtime, or going back to school to get more training.

Refinance or Consolidate Loans

So you have squeezed your budget as tightly as possible and can’t work any harder. In fact, you are worn out from working hard and never see your family. Still, there isn’t enough income coming in to pay all the bills. What do you do now? At this point, many people begin borrowing money to pay what they owe. This is called the “Borrow from Peter to pay Paul” stage. Unless you have a solid plan on how to repay the extra money you borrow, you are only buying time and putting off the problem. In the end, it will likely end up worse for you and your family. After all, loans aren’t free. For every dollar you borrow, you have to pay it back, plus interest. No one ever got out of debt by borrowing money. Thousands of good, hard-working people have borrowed money with good intentions hoping that their future would be better than the present. Hope is great, but in hindsight it can make us do some foolish things. Many people take out a second mortgage on their home to pay credit card bills and other expenses, putting their home at risk. In order to take out these loans, you are forced to put your home up as collateral in case you cannot pay the loan. If you can’t pay, the lender takes your home. Additionally, if you put your home to a second mortgage, you are essentially turning a short-term problem into a long-term problem. Think about it. The only reason why a second or third mortgage is a cheaper monthly payment is because you are trading a short-term obligation for a long-term obligation. Most of these mortgages last for 15 to 30 years. In many cases, this period extends well after retirement. Are you willing to tie up 15 to 30 years of income desperately needed to take care of your family? Should you continue to borrow from Peter to pay Paul? The answer carries a lot of risks and can hold your family hostage for years to come. The real problem can come years down the road when you run out of money to pay the mortgage and the whole house of cards comes tumbling down. If Paul is holding a mortgage on your home, Paul starts foreclosure to put your home up for sale. This is the essential question: With only so many income-producing years, do you really want to spend the best years of your life in debt?


1. Credit Counseling Agencies: What Are They? What Do They Do? Very simply in many cases Credit Counseling  Agencies are collection agencies working for and controlled by credit card companies. We'll explain this more below. What can Credit Counseling Agencies do for me? At most, they will help you lower your interest rates a little with the credit card companies that are willing to participate. If what you really need is to eliminate debt, Credit Counseling Agencies are of no use whatsoever. Only bankruptcy can actually get rid of debt. Is it any wonder that credit-counseling agencies hate bankruptcy? They work for the credit card companies and the credit card companies know that the one thing that can "unhook" you from their control is bankruptcy. If you can't pay all your bills and want to consider a credit-counseling plan, the second best advice I can give is to first check out how bankruptcy works and what it will do for your family. You will be totally surprised. Bankruptcy is so much better than credit counseling. If you don't take the time to check out bankruptcy before you sign up for a credit-counseling plan, you won't know the facts until it's too late. Any bankruptcy law firm worth its salt offers a FREE INITIAL CONSULTATION. The best advice I can give you is to never put good money into the hands of any of these organizations. Why? Because your chances of success with credit counseling are slim to none. Some of these organizations seem to be legitimate "non-profit" businesses, dedicated to helping people. The more legitimate organizations and agencies set their customers up on repayment plans that at least lower interest rates on certain debts, usually just your credit cards.

2. Credit Counseling: Many Are Scams: The majority of the organizations that run ads on TV, and especially on the Internet, are simply scam organizations. Especially the ones that offer to make people debt free without payments and without filing bankruptcy. Their goal pure and simple is to sucker innocent people into sending them money. The sad thing is that people actually fall for these scams. As a result, a lot of good, honest, hard-working, but not street-wise people end up sending in a lot of hard-earned money. These people get absolutely nothing in return except the sinking feeling having been "suckered" and the heartache of losing hundreds or thousands of dollars that could have been used to take care of their families. It makes us sick and we hate it for these families. The bottom line: There is no truer saying than "If it sounds too good to be true it is." Unfortunately, there is very little if anything in the form of State or Federal regulation to oversee and protect the public against these scams. There is no easy way for the public to separate the scams from the possible non-scams. To make things worse many so-called credit-counseling agencies and debt management organizations pretend to be legitimate. These agencies and organizations merely trick people out of money. For instance, one or more States’ Attorneys General has sued Ameridebt. Why? Although Ameridebt held itself out as being a non-profit organization it was not. Allegedly, this organization illegally absconded with its customer's full first payment, money that should have been applied toward the payment of the customer's bills.

3. Credit Counseling: The False "Non-Profit" Pitch: One of the hooks used by these organizations is their representation that they are "non-profit.” The truth is any organization can make itself look like a non-profit agency by simply paying huge salaries to officers and other employees or by paying inflated costs out to affiliate "for profit" companies.

4. Credit Counseling: The Misleading "SAVE 60% IN JUST SECONDS" Pitch:

Credit Counseling outfits will get your attention by saying things like, “SAVE 60% IN JUST SECONDS.” They are only talking about credit card accounts and only the credit card companies that have agreed to play ball with them. More importantly is the fact that this pitch sounds like they are eliminating some of your debt. This is NOT true. At most, they can lower the interest rate on a few credit cards. The main distinction between credit counseling and bankruptcy is the fact that bankruptcy can get rid of all the debt and interest. Credit counseling can only lower your interest and monthly payments on specific credit cards. In most cases, filing bankruptcy, especially under Chapter 7, eliminates ALL the interest and ALL the debt.  

5. Credit Counseling: At Best, They Are "Bill Collectors," Working for and Controlled By Credit Card Companies: Even the true non-scam credit counseling operations are basically collection agencies for credit card companies. It works like this certain credit card companies agree to lower their interest rates in exchange for regular monthly payments. They set up a repayment plan for a period of years by one of these credit-counseling outfits. Why do the credit card companies agree to this? The credit card companies’ main purpose is to keep would-be customers out of the hands of bankruptcy attorneys. Why? Bankruptcy attorneys don't just lower interest rates, they make the credit card companies pay for their loose and risky lending practices. The lending practices that leave good, honest, hardworking people with more debt than they can pay. Bankruptcy attorneys use federal bankruptcy laws to get people out of debt. You not only get rid of the debt, you also get rid of the obligation to pay interest on the debt. Is it any wonder the credit companies hate bankruptcy and love their "legitimate" credit-counseling organizations? At least with credit counseling repayment plans the credit card companies have a shot at getting all their money back plus some interest. That is better than the customer filing bankruptcy and the credit card companies getting nothing. In fact, we’ve been told on several occasions that legitimate credit counseling agencies are not allowed to mention bankruptcy. With that in mind, do you even wonder why credit counseling places "bad mouth" bankruptcy? Bankruptcy does what credit-counseling agencies can only dream about doing for their customers.

6. Point By Point - Bankruptcy versus Credit Counseling: Let's get more specific and see how Credit Counseling stacks up against Bankruptcy. Here are just a few of the things bankruptcy can do that credit counseling cannot.

  • Bankruptcy can get rid of debt. When you get rid of debt, you also get rid of the obligation to pay interest on that debt. Credit counseling can only get rid of some interest. With credit counseling, you still have to pay all of the debt, and most of the interest. The credit counseling pitch about getting you “debt free” or "Save you up to 60% in seconds" is false and misleading. Credit Counseling promises but only bankruptcy delivers.   ( Click here for a quick graphical comparison of scams, credit counseling and bankruptcy. )
  • Bankruptcy lets you put creditors under control, Credit Counseling puts the creditors in control.
  • Bankruptcy gets rid of "pay day" loans. Credit Counseling can't do anything.
  • Bankruptcy can put your secured creditors under control. For example, if you are behind on your house or car loan, bankruptcy can put these creditors under control, giving you months or even years to catch up. This takes the pressure off, and can be the difference between keeping or losing your house and car. Credit Counseling can't do a thing with these creditors.
  • Bankruptcy can lower your monthly expenses, in the vast majority of cases, significantly more than Credit Counseling. Think about it. Bankruptcy can get rid of debt, and getting rid of a debt stops the payment permanently. You never have to pay it again. With Credit Counseling, you still have to pay the debt. At best, Credit Counseling can only get rid of some of the interest.
  • Bankruptcy helps you re-build your credit faster. The first step to re-build your credit is to eliminate debt. Why? Eliminating debt allows you to afford new credit, which attracts new lenders who are willing to give you more credit. Credit Counseling doesn't get rid of debt, only some interest. That means it will take you longer to get out of debt. The longer it takes you to get out of debt, the longer it will take you to look attractive to new lenders willing to give you credit. Credit Counseling makes you less attractive to lenders and therefore hurts your ability to get credit.
  • Bankruptcy can stop wage garnishments AND Bankruptcy can get rid of Federal and State income tax debt. Bankruptcy can put the IRS and State tax agencies under control, stopping wage garnishments and tax levies. Bankruptcy can actually get rid of significant Federal and State income taxes (as long as you qualify under 4 simple rules), while Credit Counseling can't do a thing. Credit Counseling has no power over Federal or State income tax agencies.
  • Bankruptcy is a Federal law and has the full weight of the U.S. Federal government behind it. Credit Counseling is controlled by the credit card companies, who can change the rules of the game anytime they want.
  • Bankruptcy is an established system of law, procedures, and regulations, created to protect you. The Bankruptcy system is run by Judges and lawyers licensed to practice and closely policed by State Bar licensing boards. The Credit Counseling industry is completely unregulated, with no one to protect you at all. Is it any wonder so many people get scammed out of their hard-earned money by so many of these organizations? Don't take our word for it. Read about the abuses for yourself. See the reports referred to below.
  • The Bankruptcy version of "bill consolidation" is called Chapter 13 and is closely regulated to make sure that you can afford to make the payments. It also puts the full authority of the Bankruptcy Court to work for you to make sure no one takes advantage of you. Credit Counselors will put you into a payment plan even if you can't afford it. Why? If they checked your budget, they would know right off the bat that you couldn't afford their plans and should find another solution. So, what's the harm of agreeing to pay a credit counseling repayment plan you can't afford? Think about it. If you can't afford to pay the plan payments then you won't complete the credit counseling payment plan. If you don't complete the payment plan then in the end, your hard-earned money will be wasted. Your family will be even worse off and to make matters worse the credit card companies will go back and add on all the interest, late fees and over-the-limit penalties, as if you never signed up for the credit counseling plan. In other words, for lack of a better term, you and your family get "screwed.” You lose, while the credit card companies that control the credit counseling agencies win. Every month that you keep paying is one more month they make money off you and one more month they kept you out of the hands of a bankruptcy attorney.

The bottom line : Instead of telling people how bankruptcy really works and all the good things that can come from filing bankruptcy the credit counseling outfits are forced to feed off the "stigma" that most people attach to bankruptcy.

7. Credit Counseling: Putting People Into Plans They Cannot Afford: We've seen so many people spend hundreds of dollars a month on credit counseling repayment plans, which suck away money that is desperately needed to take care of their families. These repayment plans virtually guarantee that in the final analysis, the only option left will be bankruptcy. You might ask why credit-counseling places don't spend more time making sure that their would-be customers can afford the plan. The answer is three-fold. First, from our experience as bankruptcy attorneys, most people have not been taught how to budget. Additionally, hope runs eternal in most people so by telling someone that they can reduce a $800 a month payment down to $600 is very seductive. In our experience, most people when asked whether they can afford the $600 per month (in our example) will naturally say "yes" without ever putting pen to paper to work out the numbers. Any savings is better than none, right? Secondly, working up an actual budget of necessary monthly income takes time and effort. Third, taking the time to work up an actual budget would reveal the ugly truth that most of their would-be customers really need to lower their monthly expenses much more than the credit counseling agencies could possibly offer. How do we know? In our office, time and again, we see people who have fallen out of these plans. People who found out the hard way that they could not afford the credit counseling company's repayment plan.

8. Credit Counseling: Leaves Families Worse Off: Putting people into credit counseling repayment plans that they cannot afford only makes things worse. If you pay money for something you cannot afford, then you have to take that money away from paying something else. Many times the money is taken away from paying things far more important than credit card debt. Things like your car payment, house payment, or your children's needs. I have seen people lose cars and homes needlessly because they signed up for a credit counseling repayment plan rather than filing bankruptcy. What they don't tell people, in our experience, is that when you fall out of one of these credit counseling repayment plans, the credit card companies retroactively add in all the interest, penalties, and late fees that would be owed. It is as if you were never set up on the repayment plan.

9. Credit Counseling's Real Purpose: To Keep People Away From Bankruptcy Attorneys: We are sure there are people who have successfully completed one of these credit-counseling plans, but we suspect the percentage is very small. From the credit card company's point of view, credit-counseling programs are always a success regardless of whether or not the customer completes the repayment plan. Why? Every month a customer makes a payment on one of these repayment plans is a month the credit card companies take in more money than if the customer filed bankruptcy. Just one more month that the customer is kept out of the hands of a bankruptcy attorney.

10. Credit Counseling: The Credit Card Company "Kickbacks" They Don't Tell You About: One of the major "come-ons" the credit counseling companies employ is that fact that they don’t charge you for their service. Think about it. Every organization has to pay the bills, salaries, rent, utilities, phone book ads, and the cost of all those ads on TV, etc. The money has to come from somewhere. Where does the money come from? The answer is "kickbacks" from the credit card companies. They don't call it kickbacks. They call this money "fair share” but they are kickbacks pure and simple. It works like this. The credit card company pays the credit counseling company a percentage of the money that the credit counseling company collects for and sends in to the credit card company. The problem with these kickback-based operations is that the credit card companies can then exert tremendous pressure over the credit counseling companies to downplay, bad mouth, and misrepresent the bankruptcy laws. In fact, one of the rules by the organizations that oversee credit-counseling agencies use to be and perhaps still is that the word "bankruptcy" is never to be mentioned, much less discussed. What a surprise?


11. More Bad News About Credit Counseling: This is just the tip of the iceberg. There is lot of bad news about Credit Counseling. Don't take our word for it. See for yourself the report from the Consumer Federation of America, a major consumer protection organization. To find the report, go to , click on "Finance,” then "Credit and Debt" and then click on "Credit Counseling". The report is entitled: "FIRST-EVER STUDY OF CREDIT COUNSELING FINDS HIGH FEES, BAD ADVICE AND OTHER ABUSES BY NEW BREED OF "NON-PROFIT" AGENCIES.”