March 9, 2020
Alternatives to Bankruptcy in Alabama
Bankruptcy can be a great way to get a fresh start if you are buried in consumer debt. However, there are many situations when alternatives to bankruptcy would be a better solution. If you are struggling with debt, experienced Montgomery bankruptcy lawyer Charles Grainger can advise you as to whether bankruptcy or a bankruptcy alternative would be more appropriate for your situation.
Getting “Out of the Hole”
Bankruptcy is simply a powerful tool but before selecting a tool (or combination of tools) you need to know what the goal is. Our firm uses a slogan that “we help you get out of the hole.” When people say they are “in the hole,” they mean that their income is not high enough to pay: (a) their living expenses plus (b) their debts. Our clients almost always mention that they want to pay their debts but are simply unable to do so in a way that creditors will work with them.
To get out of the hole, income must equal or exceed living expenses plus debts. This means there are three categories of solutions which may work in combination:
Examples may include getting a second job (or better job); getting child support; getting a roommate to share expenses; getting assistance from friends or relatives; or selling or refinancing assets.
Decrease living expenses
In our experience, people who seek our assistance have often cut back on living expenses to a reasonable degree anyway. Sometimes, however, people try to preserve a lifestyle they cannot really afford and continue to live in denial. More often, they have experienced a decline in income and can no longer maintain the obligations of the lifestyle they had at a higher income but are willing to adjust their lifestyle to their income.
In our experience, the most important thing a client can do about living expenses is not to lower it but to find out what the total number is. Why is the total number so important: it defines what tools are most appropriate for debt-relief. For example, a client and his wife have take-home pay of $3,200 per month and have living expenses of $4,100 per month. This couple has no funds available to pay their debts. The only debt relief option that is feasible in this example is a Chapter 7 bankruptcy because it does not require any repayment whatsoever. Another example, that same couple earning $3,200 per month has living expenses of $2,800 per month leaving $400 per month available for debt relief. Having some funds available opens up other possibilities.
Most people can give precise numbers for their income but very few have any idea what their living expenses add-up to. We work with our clients to arrive at a comprehensive and solid estimate of living expenses to help determine what their best options are for debt-relief so that we can help them “get out of the hole.”
Non-Bankruptcy Debt Relief Options
- Do nothing. Let them sue but “you can’t get blood out of a turnip.” This option only makes sense when someone is “judgment proof.” This means that a creditor can get a judgment against them but still has no means of collecting on the judgment. There are four ways of collecting on a judgment and this option only works when none of these four does significant harm:
- Garnishment of a paycheck. Social security cannot be garnished and self-employed / independent contractors don’t get a paycheck to garnish. If a client is employed, a garnishment can take 25% of their after-tax income which would be unacceptable.
- Garnishment of a bank account. Collection attorneys can garnish your bank account even if you are self-employed or disabled. Changing banks in order to “fly below radar” may or may not be workable. Doing without a bank account may or may not work for you as well. Creditors will garnish the entire balance of a bank account.
- Judgment Liens. In Alabama, the court’s judgment does not create a lien on your property until it is recorded in the real estate records of your Judge of Probate’s office. A lien by itself is not painful like a garnishment and sometimes will be ignored but it has longer-term negative consequences on one’s credit and must be paid, for example, if someone seeks to refinance a house.
- Sheriff’s Sale. A creditor may have the Sheriff sell some of your assets in order to satisfy a judgment. You can protect a certain amount of property from a Sheriff’s sale with declaring a limited amount of property to be exempt. Alabama may have the lowest exemptions in the United States. See an experienced attorney to learn more about exemptions.
- Debt-Consolidation Loans. If you had great credit and an excellent debt-to-income ratio, you probably would not be looking at this site. But that is what it takes to get a debt-consolidation loan from a bank or credit union at a reasonable interest rate. The objective is to get a lower interest rate.
- Credit Counseling Plans. These are payment plans primarily designed for credit card debt and which seek a lower interest rate usually in the 8-10% range. The debt is usually to be paid in full and you usually pay what the minimum payments were anyway so, if you are “in the hole,” this will not help get you out. Because these plans don’t offer relief on the monthly payment obligations, they have a very high failure rate and result in very low credit scores. There is no legal protection or requirement that creditors participate. For years I could tell if someone was in a credit counseling plan because they were being sued by Discover Bank. These are setup as non-profits so as to make the consumer think it is a charitable undertaking financed by some wealthy person. The truth is they get paid by the creditors – who are not your friends because they just want their money. By comparison, the most expensive Chapter 13 that only is paying unsecured debt at 100% of what you owe them, costs about 2/3s of the minimum credit card payment including attorney fees, is interest-free, gives legal protection, is supervised by the federal government, pays it all off in 5 years and results in better credit scores. And frequently Chapter 13 payment plans don’t have to pay creditors in full so a better deal than that can often be obtained.
- Negotiating with Creditors. Ironically, it is the smaller banks who are willing to work with people when they are having a hard time. Larger banks and collection agencies are much more difficult. When getting sued, it can be possible to negotiate a payment arrangement with the attorney for the creditor, however, it will require a consent to judgment and a disclosure of information which can later be used for purposes of garnishment or sheriff’s sale in the event you are late on a payment so be careful. Fundamentally, it is a difficult strategy to execute because each creditor wants their money and doesn’t care if you cannot afford to do that while paying other creditors. Do not agree to anything that leaves you unable to pay your living expenses and the other creditors what they want or the strategy will fall apart.
- Debt Settlement. Do not deal with any companies who are not licensed by the Alabama Securities Commission. In 2012, our firm had 37 clients who had been scammed by debt settlement companies. They promise “pennies on the dollar” settlements and will usually settle the smallest one first to hook you. Any company that regularly takes a payment from your bank account is likely a scam – particularly if you found them on the internet, a radio commercial or if they called you to get your business. There is no legal protection in a debt settlement strategy and the creditors are free to sue you while this company is taking money out of your bank every month. It is possible to do a legitimate debt settlement. Due to the lack of legal protection, it is best done by settling all of them simultaneously rather than through what Alabama law calls a “sale of checks.” We estimate that it takes about 65% of the balances owed to pull this off though it varies. Some creditors will take less and some demand more. It depends upon many factors. Amounts saved through a debt settlement become taxable income so there should be an allowance for additional taxes.
Due to the large amount of money required for a legitimate debt settlement, the situations where it seems to work are:
- Where a relative or friend is paying for it.
- Settling the estate of someone who has died in order for more to go to the family.
- Where someone has property they can sell or refinance to come-up with the money.
A legitimate debt-settlement can be performed by the client owing the money or by a licensed attorney familiar with the process. The important thing is to make sure a written release of the debt is provided before giving them the money.
Contact a Knowledgeable Bankruptcy Lawyer
Charles Grainger is an experienced bankruptcy attorney who can advise you on whether bankruptcy or any bankruptcy alternatives are appropriate for you. We can suggest long-term solutions to your financial troubles depending on your particular situation. At Grainger Legal Services, we represent clients from our offices located in Montgomery, Prattville, and Troy in order to help people in South-Central Alabama “get out of the hole.” Call us at (334) 260-0500 or contact us online to schedule a free consultation.