Creditor Workout Programs
A number of businesses advertise creditor workout programs under a variety of names. Most of them involve you hiring the company to negotiate with your creditors in an effort to convince the creditors to voluntarily reduce your debt, and interest rate, and allow a payout that you can afford. Some of the disadvantages that these types of workouts may involve are:
1) Negotiation is just that — your creditors are under no obligation to agree to anything.
2) If you do reach an agreement with a creditor for a payout and you miss a payment the agreement is automatically canceled.
3) You typically pay the company you hire whether your creditors agree to anything or not.
4) Debt that is “forgiven” by a creditor may be treated by the IRS as income.
5) Your credit typically does not begin to improve until you have completed your payout.
Other Types of Bankruptcy
Chapter 13 Bankruptcy
While Chapter 7 is a “liquidation” of debt, Chapter 13 is a “reorganization” of debt and is only available to an individual with income. Generally, in a Chapter 13 the debtor’s reasonable and necessary living expenses, as measured by IRS standards, are subtracted from the debtor’s income. The debtor pays the difference into a Chapter 13 “plan” monthly for 5 years, and any remaining unsecured debt is then discharged. In addition, any non-exempt property that the debtor owns must be sold and the proceeds paid into the plan. The court maintains scrutiny over the debtor’s finances during the 5 years and the debtor must obtain permission to incur any debt, which usually requires a special circumstance. There is not much opportunity to improve your credit rating until your case is completed. However, if you cannot qualify for a Chapter 7, or if you are behind on your mortgage or vehicle payments and are not in a position to catch up, Chapter 13 may be your best alternative.
Chapter 11 Bankruptcy
Chapter 11 is generally a reorganization of debt for larger business. Chapter 11 is usually very expensive relative to Chapter 7 or Chapter 13. It is not typically the proper vehicle for individuals.
There are several other types of bankruptcy that are not applicable to individual debtors unless you are a family farmer or a professional fisherman.