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     In good times and bad, businesses and consumers often find themselves unable to pay their monthly credit card and other debts. There are many different ways to consolidate or renegotiate these debts outside of bankruptcy. First, there are nonprofit creditcounseling and debt repayment services. The TV and radio airwaves are full of ads for these agencies. They promise to lift the beleaguered debtor out of his morass of unpayable debt, andback into a productive life. Another method is for the debtor to negotiate directly with his creditors and try to consolidate or restructurehis debts. Finally, a debtor may wish to employ a licensed attorney to assist him in debt consolidation. There are advantages and disadvantages of each of these approaches, depending on the debtor's particular financial situation.

Counseling Agencies

     These agencies will meet with the debtor in a personal session to go over his income, expenses, assets and liabilities, and try to work out a repayment plan. These agencies often act like an Counseling Agenciesout-of-court Chapter 13 trustee. Many will advise the debtor to go into default on his payments, and stop paying his creditors directly. They will offer to negotiate with each of the debtor's creditors directly, to try to secure a lower interest rate, a principal discount, and/or a lower monthly payment. Then, once the agreements are made, the debtor will make one monthly payment to the agency, which is then distributed to the creditors on a pro rata basis each month. The agency is paid by receiving a "cut" of the debtor's monthly payment, usually somewhere between 5-15%. This is somewhat similar to the percentage received by the Chapter 13 trustee, which is generally between 4-10%. Also, the debtor is often required to pay an upfront sign-up or administrative fee.


Selection of a Debt Consolidation Agency

     Selection of a reputable credit counseling or debt repayment service is very important to the success of a debt consolidation plan. The agency should be a member of the Association of Independent Consumer Credit Counseling Agencies ("AICCCA"), or the National Federation for Credit Counseling ("NFCC"). These groups attempt to have their members follow professional practices, and keep the cost to the consumer to a minimum. Agencies which charge very large upfront fees, or high monthly service fees, are most likely not members of either group.

Consumer Credit Counseling Service ("CCCS")

     Consumer Credit Counseling Service ("CCCS") has been providing valuable help to consumers for decades, and is highly regarded. Representatives of CCCS have often spoken to bankruptcy attorneys about their service. In a particular case, it may be better for a person to avoid filing bankruptcy and instead go into an out-of-court debt repayment plan. This could be the case where the consumer has just about enough income to meet all of his expenses, and just needs to have the interest rate reduced, for instance, to allow him to do so. Most of these plans provide for full payment of the debt over a maximum 44-month period. The consumer also agrees to incur no new credit card debt during this period.

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Factors to Consider Before Entering a Repayment Plan

     Before using the services of a debt consolidation or credit counseling service, the consumer should keep in mind the following four factors:

1). Only about 50% of the plans are ever completed, so the debtor is often out the money he spent, and has simply delayed the inevitable;

2). Some agencies are not reputable and may end up breaking their promises to the client, keeping money to which they are not entitled, and, if they have no kind of insurance or bond, this leaving the consumer with little legal recourse;

3). The consumer's credit rating may be damaged by going into default and then making payments under a plan, and the agency should require that the creditors report that the debt is being handled per a consumer counseling plan; and

4). There are potential adverse income tax consequences if less than the total amount of debt is paid back, because forgiveness of indebtedness constitutes income under Internal Revenue Code Section 61(a)(12); this is subject to certain qualifications under Section 108(a)(1) of the Internal Revenue Code, including whether the debtor is insolvent at the time of the debt forgiveness.

Personal Debt Renegotiation

     Sometimes it is possible for the debtor to simply call his creditor or creditors directly and attempt to work out a restructureor reduction of the debt personally. This type of approach is often taken with business-type debt, and it helps if the debtor is somewhat financially sophisticated and unafraid of dealing with banks and lawyers. The debt restructuring can take many different forms, including a discounted, lump-sum, one-time payment, which the creditor agrees to accept as payment in full, or installment payments over a period of time. The funding for the lump-sum payment often comes from a borrowing or gift from a friend, relative, or business associate. It usually helps if there are only a handful of creditors involved.

Debt Restructuring Through an Attorney

     The debtor may elect to hire an attorney to represent him in trying to obtain an out-of-court workout or settlement with his creditors. This can be advantageous, especially if the attorney is knowledgeable and experienced in this area, and charges a reasonable fee for his services.


Selecting the Proper Attorney

     Care should be made in selecting the proper attorney for the job. It does not make sense to pay an attorney an hourly fee of $ 300 or more, just to have the attorney make a number of phone calls and send letters and emails to creditors, if the attorney is not reasonably sure that the efforts will bear fruit. Some attorneys may charge a "success fee", where they are paid a fee based on the success they have in reducing the amount of the debt.

Written by Henry Rendler

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