Debt relief is not the same as bankruptcy. Debt relief is a broad term that could apply to many different things. Examples of debt relief are a loan consolidation program, a home loan modification, or negotiations to reduce credit card or other loan balances. Debt relief is a benefit of bankruptcy. Bankruptcy provides legal protection from creditors and debt collectors. The scope of legal protection afforded by bankruptcy is not available under non-bankruptcy debt relief options.
Below are examples to consider:
- Suppose you have defaulted on your credit card payments. You contacted your credit card company and successfully negotiated a reduction of your credit card balance. Your credit card company is willing to reduce your balance from $10,000 to $9,500. But you can only afford to pay them $5,000. With a little help from your cousin, you would be able to pay them off for $7,000. You offer to pay the account off for $7,000. At this point, instead of continuing with the negotiation, your credit card company is permitted to enforce its legal rights and file a lawsuit against you to collect the full balance of $10,000. In the meantime, you’ve been withholding money from payment on other debts in hopes that you could go ahead and pay off this credit card debt. If the credit card company sues you and obtains a judgment against you, they can then record the judgment and create a lien against your home. Or, they can use the judgment to garnish your wages or your bank account. Now you’re in a real bind.
- This time, suppose you receive a solicitation from a loan consolidation company in the mail. The loan consolidation company offers to organize all your debts into one payment they promise to negotiate settlement of your debts at some amount less than their current balances. To achieve this, you will make one monthly payment to the loan consolidation company, and they will distribute that payment among your creditors according to whatever settlement agreements they arrange with each creditor. Of course, part of your monthly payment will include a fee to the loan consolidation company. All your debts are being handled and, as long as your monthly payment to the loan consolidation company, you’re free to spend your time worrying about things other than debt. Peace of mind at last, right? Maybe not. While the loan consolidation company may be able to work out a deal with some of your creditors, chances are that not all of your creditors are willing to reduce your balance. Even worse, all of these creditors are free to disregard the loan consolidation program and file a lawsuit against you to collect the full account balance. And don’t forget, the whole time you’ve been paying the loan consolidation company to avoid this scenario. Despite paying for and participating in the loan consolidation plan, a creditor may still sue you, obtain a judgment, and create a lien against your home, garnish your wages or garnish your bank account.
How is bankruptcy different?
Bankruptcy differs from debt relief because the Bankruptcy Code creates a legal shield called the “automatic stay” to make it unlawful for creditors to attempt to collect a debt from you once you have filed a bankruptcy petition. Filing a bankruptcy petition with the bankruptcy court will give you this protection. Once your bankruptcy petition is filed, it is unlawful for a creditor to make an effort to collect a debt by calling you, filing a lawsuit against you, garnishing your wages, garnishing your bank account, or taking any other action.
If debt is making you feel overwhelmed, we’re here to help put your mind at ease. Contact Kelley, Lovett, Blakey & Sanders at 1-800-371-4188 or fill out the easy-to-use contact form on our website. With over 30 years of experience and three locations across Georgia, we are the experts in strategically guiding you toward financial freedom.