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Personal Finance
Options for bankruptcy
January 16, 1998: 2:05 p.m. ET

Debt Counselors of America president on who should file, and when
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NEW YORK (CNNfn) - Before you make the difficult decision to file for bankruptcy, remember you do have some options. Don't forget that with some 35 million people on the financial edge, creditors are more willing than ever to negotiate a payment schedule. In some cases they'll reduce or eliminate interest rates.
     But you have to call them and explain your situation and then get the agreement in writing. If you have as an for example, 10 creditors, this process can get tricky. So another option is to contact a credit counseling service. Most of these services are non-profit. They will contact your creditors for you and negotiate repayment. They will also help you out with a plan your financial recovery.
     Another option is a debt consolidation loan. These are often home equity loans. But be very careful with these because although they look like fast relief, they could take longer to pay and you could be putting your home at risk.
     To discuss the various alternatives to bankruptcy, Steve Rhode, President of Debt Counselors of America spoke with "Take It Personally " Thursday as part of CNNfn's special coverage on personal bankruptcy. The following is a partial transcript.

JOHN METAXAS, CNNfn ANCHOR, TAKE IT PERSONALLY: All right, people are now starting to get their holiday bills in the mail. And if they're in trouble -- before we look at the alternatives -- what if (they) do nothing? What happens?
     STEVE RHODE, PRESIDENT, DEBT COUNSELORS OF AMERICA: Well, if you can't afford to pay your bills and you're just hiding behind that, pretty soon the collection calls are going to start and legal action. Doing nothing is never a good choice. Putting your head in the sand will only prolong the inevitable.
     METAXAS: All right, the first option is to get a loan to consolidate it, either a home equity or maybe you have a large credit line on a credit card. Put every (one) on one card. Is this a good idea?
     RHODE: Home equity loans are maybe good for a lot of people. But they can also be dangerous. You just need to be aware of what the consequences are. When you are getting a home equity loan, interest rates are low. But you're also putting your home at risk. If something happens, you could loose your home to foreclosure. And with high home equity loan percentages, for example, you might've seen home equity commercials which will lend you 125 or 150 percent of the value of your home. You're really way overextended. And if anything unexpected happened, accident, illness, injury, divorce, something like that, you could be in real trouble.
     METAXAS: And regarding your home in some states, even if you declare bankruptcy, you can probably keep your home.
     RHODE: Yes, you can probably keep your home especially if you don't have a lot of equity in it or you include it in, say, Chapter 13 bankruptcy.
     METAXAS: All right, how do you know if you need to take the next step which is to try to negotiate a settlement with your creditors?
     RHODE: Well, I would always first start out with negotiating with your creditors. Contact them. See what they'll be able to do. Now if you want to negotiate a settlement, that's a little bit trickier. Creditors may not notify you that there are some tax consequences to settling. And it can appear negatively on your credit report.
     METAXAS: In other word, you might have to pay income on the amount you no longer have to pay them?
     RHODE: Yes. Any amount of debt forgiven more than $600 can be reported -- well actually -- should be reported to the IRS on a form 1099. And you will be expected to pay tax on that amount at the end of the year. If you couldn't afford to pay the debt just hope you have the money saved up to pay the taxes.
     METAXAS: Now how willing are creditors to negotiate? Are stores more willing than credit card companies? (Is) Visa more willing than MasterCard or American Express?
     RHODE: It's all across the board. I think ... the key is communication. A lot of people are ashamed or embarrassed when they get themselves into a jam. And so they don't answer the phone. They don't open the mail. Always be proactive and at least make an attempt. And if the creditor is unwilling or you're just completely overwhelmed you can always contact a non-profit counseling agency, say, like Debt Counselors of America.
     METAXAS: All right, now if you have a number of creditors is that really the better way to go?
     RHODE: It really does become overwhelming. It's scary. You just ... you've never been in that situation before. The collection calls are coming. You don't know what the best terms are. That's why a lot of people select bankruptcy. It gets it over and done with. It's behind them. However, by contacting a counseling agency that normally handles this type of situation you can get everything over in just a couple of phone calls and at least make some progress towards resolving your debt without bankruptcy.
     METAXAS: All right. How do you find the right debt counselor? Now it's my understanding that some of the debt counselors are funded by the credit card companies. Is there any conflict of interest there?
     RHODE: Well we receive contributions from creditors for our efforts, and I wish that consumers could afford to give us enough contributions so that we didn't have to ask creditors for money to help fund our efforts. But it is in the consumers best interest. I can tell you unequivocally that we have never had a creditor contact us and tell us how to conduct our business, what we should do, what we should say. There's no party line.
     METAXAS: Can you get a better deal -- you and other credit counselors -- than somebody could negotiating on their own?
     RHODE: Well at least we know what the maximum terms are.
     METAXAS: What are the maximum terms?
     RHODE: Well, a lot of creditors will completely eliminate interest. And then many of them will reduce interest. A few of them will do nothing. However, if you're behind you won't fall further behind. And if you make some consistent, consecutive payments then they will bring you account current.
     METAXAS: And in terms of a settlement, what's the best you can do, 50 percent, 60 percent? What?
     RHODE: Well I've seen it all across the board. And of course the best thing you need to do is you need to get it in writing.Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.