Bankruptcy alternatives
How a debt workout helps in saving your property
When a person lands in deep financial trouble, many a times bankruptcy appears as the only way out. A person unable to cope with creditors maybe tempted to go for a Chapter 7 bankruptcy so that the debts are discharged forever through a bankruptcy court. This option appears even more lucrative because by going for any option other than bankruptcy, you will have to pay at least some money, even if it turns out to be pennies on the dollar.
But the problem with bankruptcy is that it is the worst thing possible on your credit report and rebuilding your credit after bankruptcy will require much time and effort. A Chapter 7 bankruptcy maybe filed in days and the process will most likely finish in 4-8 months in most cases. But that will not be the end of the story for you. A Chapter 7 bankruptcy will remain on your credit report for 10 years and you may have to report it in certain financial statements even longer. Plus, bankruptcy may not only leave credit scars but emotional scars as well. Even if you are trying very hard to get your credit back on track after a bankruptcy proceeding, it will take not less than three years to get back to normalcy.
Its because of all these factors that most people view, and very rightly so, bankruptcy as the very last option to get out of the debt mess, to be exercised only when other options are no longer available.
Thankfully, even if your credit situation looks alarming, there are a few options that can be explored before thinking about bankruptcy. Many a times, when you consult an experienced attorney to workout your bed credit situation, you find that situation is really not that bad as you thought it to be.
One of the options that must be considered when the credit situation looks beyond control and you feel that you are in debt over your head is debt workout.
What is a debt workout
In a debt workout, your attorney will contact your creditors and will reach at an arrangement with them which would require you to make some payment to your creditors. These payments will be less than what you were originally required to pay and your account will be deemed settled in full after this low payment. In another instance, you may still have to make full payment to your creditors but now over a longer period of time than originally planned. Another option may require you to pay a small settlement amount to your creditors immediately and remaining period over a long time.
Why will a creditor agree to a debt workout
Many creditors agree to a debt workout and the reasons are not very far to seek. Most debtors looking for a debt workout can classify as bankruptcy candidates. If the matter does reached a bankruptcy court, in all likelihood the creditors will end up with either very little or nothing. So a debt workout ensures that a creditor will get at least something more than in the case of debtor filing for bankruptcy.
The above discussion makes it amply clear that to carry out a debt workout successfully; the pivotal role played by the debtors attorney cannot be overemphasized. And therefore, anyone is thinking about a debt workout need to be very careful in the choice of attorney. The best case scenario is to get a lawyer who has handled similar cases often enough. Also, it helps if your attorney shares your attitude and philosophy as this makes you more comfortable in dealing with your attorney and making your position clear to him/her. Always keep in mind, an attorney who is looking all-ready to quickly file for bankruptcy without trying to fully understand your lifestyle or financial situation may not be the best option. A lawyer has to discover all the options such as doing nothing for the time being, paying some creditors in full and debt workout, apart from the last option of bankruptcy.
Debt workout can help you in saving your property.
There are means and ways by which you can keep your property through a debt workout option; even if you have missed your mortgage payment and foreclosure letter has arrived. As in any other case, in financial matters also, the sooner the problem is dealt with, higher the chances of it getting cured. If you are only a few months behind your mortgage payments, debt workout has brighter chances of success.
Let us look at a few ways of saving a property through a debt workout.
Short Refinance: You can get the property facing foreclosure, refinanced. For e.g., if you owe $100,000 on the mortgage and another $10,000 on arrearage and legal fees. Now this loan is renegotiated to be settled for $75,000 and a new loan for $80,000 is arranged so as to pay off the original bank and all the transaction fees. Thus you have not only avoided the foreclosure but have also eliminated $30,000 of debt. Sometimes, you can get a friend or a relative or an investor to pay off the mortgage at a discount.
You can also modify your existing mortgage i.e. get the terms of the loan changed in such a way that you get some respite. Most of the times, these changes are temporary. Usually creditors agree to only such changes as reducing the interest rate temporarily, or extending the amortization. All such efforts can help you reducing your overall payment obligation.
Creditors however, generally prefer a repayment plan in which the debtor pays a portion of the arrearage and reaches an agreement to pay the rest as well as the regular payment over a period of six-eight months. You need a proof of income and agree to a proper down payment and most creditors will agree to such a plan. Creditors expect at least half of the arrearage plus all the legal fees to be paid upfront with the promise that the rest of the arrearage and regular payment will be made within six months.
In a debt workout, a friendly foreclosure is also achievable where a friendly third party will buy the mortgage and sells the property at foreclosure to clean the title of other lien holders. Later the property is sold back to the debtor.
Thus, a debt workout, as a preferred option to bankruptcy, provides a number of ways of saving a property whose foreclosure appears imminent.
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