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As we exit holiday season and enter the new year many people make “getting finances in order” a top resolution. While many people have this goal, it can be difficult to know where to start. There are a few options available to you. Debt consolidation, debt settlement, and bankruptcy are all ways to clear your debt. There are various pros and cons to each, so you’ll want to consult a bankruptcy attorney to figure out the best solution for dealing with your debt.

Resolution: Get Finances in Order

When one of your new year’s resolutions is to get your finances in order you’ll want to weigh all of your options.

Debt Consolidation

Debt consolidation might be a great way to roll a variety of debts into a monthly payment that might ease the stress of being in debt. According to  Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, “Debt consolidation loans allow people to roll their debt balances into one loan, presumably with a lower interest rate. This is convenient because you just have one bill to pay, and it should save you money through the lower interest rate.”

How Does it Work?

Debt consolidation loans combine your debts into a single loan. This might result in a lower interest rate, a lower monthly bill, or even both, which in turn, helps you to pay off your debts faster. These debts must be unsecured, and have no collateral attached to them, such as car, house, boat, etc… It’s important to remember that this does not decrease or erase the debt. It’s simply transferred to another lender. 

Who Should Consider?

According to Harrine Freeman, CEO and owner of a credit repair and counseling service, consolidated debt loans are the most helpful for people with multiple debts, people who owe more than $10,000, people receiving frequent calls or letters from collections agencies, people with accounts that have high interest rates or monthly payments, and those who are finding monthly payments difficult to make.

Be Wary

If you are considering a debt consolidation loan, you’ll want to double check the interest rates on the loan. Often times they are interest rate free for a certain amount of time, but then increase to a higher rate than what you had on your individually held loans. You’ll also want to make sure you’re able to pay the monthly payments. As with anything, a missed payment can be reflected in your credit score. To be safe, make sure you do your homework, and know what you’re getting yourself into when consolidating.

Debt Settlement

Debt settlement is the process through which companies are able to collect payment on a debt that you owe them. It allows you to negotiate with creditors, or in some cases collection agencies, to reduce the amount owed, thus allowing you to get back on sound financial ground.

The Process

You’ll either end up negotiating your debt with your original creditor or with a collections agency. Debt gets sold to a collections agency after you have failed to make payments for a period of more than 3-6 months (typically around 150 days). When this happens, the creditor is paid a percentage of the debt, but then walks away from it. What also happens is you’ll no longer be dealing with the creditor. From now on you’ll deal with the collections agency.

Negotiating With Creditor v. Collection Agency

There are different points you’ll want to focus on when negotiating with creditors and when dealing with collection agencies. Here are some main points:


  • Total amount owed – you can negotiate how much you are able to pay back. For example: You owe $7,000. You might be able to negotiate paying only half of that back.
  • Monthly payments
  • Your account’s standing (this is the part that affects your credit score)

Collection Agency: (you’ll want to get these in writing)

  • The amount you are paying back, and what that amount is for (either paying for the settlement, or paying the principal).
  • What debt the payment is for. This should include original creditor and account number.
  • When the payment is due.
  • Who you’re paying the debt to.
  • Your account’s standing after payment

Consolidating your debt can be tricky, but the important thing is to be proactive and smart about the decisions you make going forward and in your negotiation process.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy essentially allows you to wipe your financial slate clean without the worry of making “past due” amounts.  Certain property is sold and then used to repay debts. If there is no property that can be resold, many of the debts will be discharged or canceled, once the bankruptcy case concludes.

Criteria for Chapter 7 Bankruptcy

There are some criteria you will need to meet in order to be able to file for Chapter 7 bankruptcy.

1. Bankruptcy means test

This test compares the state’s median monthly family income to your family’s income. You may not be able to file Chapter 7 bankruptcy if your monthly income exceeds the state’s median income. This test is required if more than half your debt comes from consumer purchases other than business, tax, or tort debts (debts for injuries or damages you caused to someone else).

2. You are an individual, married couple filing jointly, or small business owner

3. No recent bankruptcy discharge

You are not legally able to file Chapter 7 bankruptcy if you had a previous Chapter 7 bankruptcy discharge within the past 8 years, or a Chapter 13 bankruptcy discharge within the past 6 years. The filing period starts the date your previous bankruptcy was filed, rather than when the bankruptcy was discharged.

4. No recent bankruptcy dismissal

You are not able to file Chapter 7 bankruptcy if you had a bankruptcy dismissed within the past 180 days for any of the following reasons: you violated a court order, abused the bankruptcy system, made a fraudulent bankruptcy filing, or requested a dismissal because a creditor requested the automatic stay be lifted.

5. Credit counseling required

To be able to file any type of bankruptcy, you are required to receive credit counseling from a government-approved credit counseling agency. You are not required to get counseling before filing bankruptcy, but it must be completed no more than 180 days prior to the bankruptcy discharge and it must include a two-hour financial management course.

Agencies offering this management course aren’t always non-profit, but they should be able to offer free or lower cost services.

Your bankruptcy case will be dismissed if you do not go through credit counseling within the specified time frame.

Considering Bankruptcy?

Because Chapter 7 can be so devastating, and can only be done once every seven years, it might be smart to weigh your particular combination of debt, income, and property before you decide it’s the option for you. And even then you might decide against it.

How Declaring Bankruptcy Can Help

Typically those who file for bankruptcy really do need it. Often the filer is already in a fragile economic position with large amounts of credit card debt when they are suddenly stuck with a bout of hard luck such as a loss of job, injury, divorce, or uninsured medical expenses that then result in mounting penalties and thus an unpayable amount of debt.

Bankruptcy law was designed to help people who need assistance to make a clean and quick break from the debt. In a few months it can wipe out unsecured debt such as credit and medical debts.


But even if you find yourself faced with unpayable debt, you still may not need bankruptcy to protect your assets. Under the Exemption Laws of California, you may already be “judgment-proof.” If you are declared as “judgment-proof” you need not fear credit card companies simply because of debts owed tothem. Unsecured creditors such as credit card companies cannot take your stuff if it’s exempt. Harassing phone calls can be stopped with a simple phone call or letter. But it’s important to remember that interest and penalties will continue to accumulate. Also, exemption laws do not protect property from all types of debts or all types of creditors. Typically, exemption laws do not protect against collection of child support or tax debts. And if you purchased property and pledged it as collateral for the purchase-money loan the lender can still take the property, regardless of any exemption law.

Non-dischargeable Debts

It’s important to remember there are some kinds of debts that bankruptcy can’t get rid of called “nondischargeable” debts. This type of debt generally includes child support, most student loans, and most tax debts. Even if you decide to declare bankruptcy you are still liable to pay these.

Other Forms of Bankruptcy

If you are falling behind on making payments for medical expenses and are looking for protection from lurking creditors and mounting debt, chances are you’ve considered bankruptcy. There are different kinds of bankruptcy besides Chapter 7 bankruptcy, including Chapter 13 bankruptcy, and Chapter 11. Here’s some information about how Chapter 13 and Chapter 11 work.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows you to reorganize your debt. You work with a bankruptcy attorney to set forth a plan to repay as much as your debt as possible during a 3-5 year period. You’ll be required by a bankruptcy court to provide detailed financial statements that support your proclaimed revenue and expenses. Once the plan is created you’ll have to make monthly payments to a trustee, who in turn pays off your creditors. Once you have completed the repayment plan, you are no longer responsible for any previous debts, even if through repayment, you were not required to pay the entire amount that was owed. Chapter 13 also stops increases on interest rates, such as the interest rate owed on a credit card. 

Chapter 11 Bankruptcy

While Chapter 11 is typically filed by businesses and corporations, Chapter 11 can also be used by individuals. If you are the owner of a sole proprietorship, you are the debtor. You also do not have a separate identity from your business. Additionally, individuals will choose Chapter 11 if they can’t are unable to file Chapter 13 because their debts are too high, or their finances are complex.

A Chapter 11 restructuring plan can help a debtor balance his or her income and expenses while also regaining profitability and continuing operations. During Chapter 11, a debtor is also able to sell some or all of his or assets to pay down debt.

Typically, an individual will file Chapter 7 or Chapter 13, rather than Chapter 11.

Working with a Bankruptcy Attorney

Bankruptcy law can be hard to understand. Because of this, it’s highly advised that you work with a bankruptcy attorney that can walk you through the process and clarify any questions or concerns you might have. There can be a lot of questions during this extremely stressful time. Let the lawyers at RHM LAW LLP walk you through the process so you can achieve the best outcome possible.

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