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How to Get Out of a Payday Loan

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How to Get Out of a Payday Loan

The payday loan trap begins innocently enough. You’re low on cash, you’ve maxed out your credit cards, and none of your family or friends can loan you the money. Borrowing $250 from a payday lender seems like a logical solution. As long as the $250 plus a $37.50 fee is paid at the end of the two-week term – the time your next paycheck comes due – you’ll be debt free. No harm, no foul.

Before you know it, you run out of money again and can’t repay the loan two weeks later. So you pay a fee to extend the loan for another 14 days. When the next term is up, you can have the lender cash your check or draw from your account for the initial amount of $250 plus the $37.50 fee, or you can pay to extend, yet again, with another fee payment.

This plot replays itself over and over again for months on end. After a year, you will have paid $975 to borrow $250. Effectively, you borrowed money with an annual percentage rate (APR) of 390%.

“It’s important to note that payday loans are structured intentionally to make it very difficult to walk away from,” says Diane Standaert, executive vice president and director of state policy at the Center for Responsible Lending. “The lender takes direct access to a borrower’s bank account in order to establish the loan, either through a check or direct access to their online account. This leverage creates a business model that makes it nearly impossible to walk away.”

This is the payday loan debt trap, but it can get worse. In this guide, we’ll explain how to get out from under a payday loan and avoid falling into the trap again.

How to Get Out of the Payday Loan Trap

There are several strategies to get out of the vicious payday loan cycle, and the strategy you choose to implement will largely depend on your financial situation.

To free up funds to pay back your loan, you’ll have to cut expenses where you can. Start by creating a budget and look at costs that are easy to cut like restaurants and other discretionary spending such as shopping trips and travel.

Next, move to some medium-cost necessities like the cable, internet, and cellphone bill or auto and rental insurance premiums. Call these companies and negotiate with them to lower costs or see if you qualify for a discount.

If you’re still having a difficult time coming up with the extra cash to pay down your loans, look to some larger expenses like your car payment and rent. It may be in your best interest to sell your car and find a more affordable mode of transportation or a less-expensive car. Consider moving or getting a roommate to reduce the cost of rent.

Finding extra money in your budget will allow you to put more income toward the debt you have acquired and catch up on your payday loans.

Work with your lenders

While you create a budget, go to your payday lender and ask if they can provide you with an extended payment plan (EPP). EPPs give the borrower more time to pay off a loan without added fees and interest and without getting turned over to a collections agency, as long as the borrower doesn’t default on the EPP.

If your lender doesn’t offer an extended payment plan, you may want to turn to any other entities you owe money to. If you have non-payday loan debt, like credit card debt, auto loans, student loans, and the like, talk to the lenders of these debts to see if they can help restructuring your debt.

Restructuring means your lender could extend the term of the loan to reduce the cost of monthly payments, or reduce the frequency of payments being made. For some student loans, you may be allowed to make income-based repayments. By reducing other required monthly payments, you will be able to put more money toward paying down your payday loans. Note that restructuring could impact your credit score, but will not be as costly as bankruptcy.

Other lenders who might be able to help

Whether you choose to work with a credit counselor or tackle the payday loan repayment on your own, another option is to seek alternative lenders who may be able to assist with getting you out of the payday lending debt cycle.

Alternative Lender #1: Friends and Family Financing

Receiving a small loan from your family is a popular option suggested on the credit website message boards. This can help you make a one-time payment to the payday lender and close your payday loan once and for all. After which, you can pay back your family in small payments made up of the fees you would have otherwise been paying to the payday lender. Typically, friends and family won’t charge you added fees or interest, so this is the most preferred and affordable route for a borrower who is strapped for cash.

Alternative Lender #2: Faith-Based Organizations and Military Relief

If you are a military servicemember or veteran or a have a religious affiliation, your participation could open up short-term lending and relief opportunities.

A few faith-based lenders have cropped up around the U.S. that are primarily focused on helping borrowers refinance their payday loans and get out of the payday lending debt cycle. One example is Exodus Lending, a nonprofit organization in Minnesota that pays off their clients’ payday loans in exchange for their clients’ paying Exodus for the loan balance over the course of 12 months without interest or additional fees.

Military service members also have protections and emergency relief assistance through various veterans organizations.

Alternative Lender #3: Personal Loans

Find cheaper funding with a personal loan through your local credit union or our personal loan database.

With a 600+ credit score, you may be able to secure a personal loan with an average APR between 6% and 36%, a range considerably lower than the 400% to 700% APRs that come with payday lending. Use the funds you receive through your personal loan to pay off all outstanding payday loans and close the door to payday lending for good.

Then make the minimum monthly loan payment for your new personal loan on time and in full.

Once you’ve built your credit above the 600 threshold, visit your local credit union to apply for a personal loan.

Continue to improve your credit score with responsible personal loan and credit card repayments. Over time, your score will improve yet again. Once your score is over 700, you will be eligible for even more affordable personal loans with APRs as low as 4%.

Are there times it makes sense to walk away?

There are times when bankruptcy is the best option to relieve debts you are not able to pay back. If you choose to go this route, you will be required to obtain a pre-bankruptcy credit counselor before you file.

It’s important to find a government-approved credit counselor through the U.S. Trustee Program (USTP) to ensure a reasonable counseling rate – a fee of less than or equal to $50 is considered reasonable. USTP-approved agencies are required to inform clients that services are available for free or at a reduced rate, based on the client’s ability to pay, prior to the exchange of any information and the counseling session.

A credit counselor will help evaluate your personal financial situation, create a personal budget plan, and look into alternatives to filing for bankruptcy, like restructuring debt or negotiating with your payday lender. After all options have been exhausted, your counselor can help you explore your options for bankruptcy.

Many borrowers have been told that bankruptcy is irrelevant for payday lending. They also fear that they could be arrested if they fail to make payments. This is a common myth spread by debt collectors for payday lenders. These threats are illegal, and if they happen to you, make sure to contact your state attorney general and the Consumer Financial Protection Bureau.

Low credit ratings and the absence of access to a bank account can lead to exceedingly expensive financial products. A Vanderbilt University Law School study found evidence that access to payday loans increases personal bankruptcy rates, doubling Chapter 13 bankruptcy filings for first-time payday loan applicants within two years.

How payday loans can lead to bankruptcy

Most payday loans are secured by getting access to a borrower’s online checking account or by receiving a signed check from the borrower for the amount of the loan plus the loan borrowing fee.

When borrowers fail to make their payment upon the loan due date, and don’t pay the extension fee, the lender can withdraw the amount due through the borrower’s online account or cash the signed check.

If the borrower doesn’t have enough funds in their account to cover the amount rendered, their check will bounce and they will incur a bounced check fee and a returned check, which impacts the borrower’s credit report and credit rating. With a record of bounced checks, the bank can go as far as shutting down the borrower’s bank account and make it difficult for the borrower to obtain any new accounts.

What are your rights with a lender?

To begin the fight against payday loans, we must review the borrower’s rights when they enter the loan agreement, understand how lenders get away with hemorrhaging money from borrowers, and what legislation is doing about it.

Payday lending isn’t legal in every state. Fifteen states and the District of Columbia (see the map above) have effectively capped payday loan interest rates at 36% APR. Residents of the remaining states without APR caps stay unprotected against the harm of the inescapable payday lending debt cycle.

According to the Consumer Financial Protection Bureau (CFPB), payday lenders are not required by federal law to offer borrowers the lowest rates available. This is because lenders charge a fixed-fee price. Some states, as Standaert mentioned, cap these fees such that the annual rate for a two-week loan doesn’t exceed the enforced rate cap.

Although lenders are not legally bound to offer the lowest rates available, federal law requires payday lenders to disclose the cost of the loan in terms of an annual APR, so the borrower will see on the website or on their contract that the interest rate is 300% or more, according to Standaert.

“Though, disclosures of the price alone do not alleviate the concerns about the predatory structures of this product,” says Standaert. “Payday loans are marketed as a quick fix to a financial emergency, but payday lenders know that their business model is built on keeping people trapped in debt they can’t repay.”

Fees versus interest

It’s important to note the language lenders use in how they structure these financial products. Payday lenders are able to charge excessive amounts in “interest” because in reality, they aren’t charging interest, they’re charging a fee.

If your payday loan were treated as a loan with a designated payback period, interest rate, and amortization schedule, then for every payment you made over the course of time you borrowed the money, a portion of your $37.50 would go to pay down your $250 loan balance.

In the case of payday loans, every payment you make to extend the loan is purely a fee-based payment, or interest-only payment with a 100% principal payment at the end of the term.

What legislation has done and will do

“A rate cap, such as what the fifteen states and D.C. have enforced, is the strongest protection they can enact on the state level. There is activity at the federal level as well,” says Standaert.

“The CFPB, has been working for the past several years to rein in the harms of the payday lending debt trap,” adds Standaert. “While the CFPB doesn’t have authority to enforce a rate cap, their strongest role is to establish rules that enforce payday lenders to assess whether the loan is affordable in light of a borrower’s income and expenses prior to issuing a loan.”

“While states have the ability to address cost, the CFPB can address the harmful nature of these loans,” says Standaert. “Restricting the predatory business practice of payday lending can allow better financial products to come to the forefront for borrowers who need financial relief.”

Standaert said that the Center for Responsible Lending and other organizations dedicated to fair financial products for consumers have seen overwhelming support for the CFPB and states to crack down on payday loans.

“Seventy-five percent of voters in South Dakota went to the ballot box this November and voted to reduce the cost of payday lending from 500% to 36%,” says Standaert. “This was the first time voters have reached a conclusion of this sort.”

Who to contact if your lender is being unfair

Standaert suggests that borrowers should file complaints with their state attorney general and the CFPB at

“Whether the cost is too high, they have issues with how their bank account is being treated, or they have experienced unfair debt collection tactics, the CFPB accepts complaints for people from all around the country struggling with payday loans for all kinds of reasons,” says Standaert.

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Tess Wicks is a writer at MagnifyMoney. You can email Tess here


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What Happens When You File for Bankruptcy?

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bankruptcy guide

If you’re struggling with insurmountable debt, bankruptcy may be an action you’re thinking about taking. In this post, we explain what happens play-by-play when you file. One thing to note is that the process of bankruptcy can vary depending on the type of bankruptcy you file and the facts of your case. The following is a general overview of how bankruptcy works for the most common forms filed by individuals. We’ll cover:

The basics of Chapter 7 and Chapter 13 bankruptcy

There are multiple forms of bankruptcy that can be filed by cities, businesses, farmers, and more. The two forms that individuals typically file are Chapter 7 and Chapter 13. Here’s an overview of both:

Chapter 7

Chapter 7 is the liquidation form of bankruptcy where your assets are taken to repay your creditors.

Some assets can be excluded from the liquidation, depending on your state and the bankruptcy agreement. Exempt items may include clothing and other household items. Unsecured debt, such as credit cards, personal loans, and debt in collections, are typically discharged.

To qualify for Chapter 7 bankruptcy, you have to pass what’s called a “means test” to prove you don’t have enough disposable income to repay your debts. You can learn more about the means test here.

Chapter 13

If you have sufficient income to repay some of your debt, Chapter 13 may be the type of bankruptcy you file. Chapter 13 establishes a debt repayment plan that lasts from three to five years.

You may be able to save your home from foreclosure through Chapter 13 by adding delinquent mortgage payments to the repayment plan. Certain debts may be discharged once you meet the conditions of your repayment plan.

What forms of debt can’t be discharged in bankruptcy?

A discharge is when you’re no longer personally liable for a debt. After discharge for both Chapter 7 and Chapter 13, creditors cannot pursue collection or legal action against you for the debt. However, the discharge can be reversed if it’s determined you were given the discharge based on fraudulent records.

Bankruptcy won’t wipe away all of your financial obligations, either. For example, you may be responsible for the following after bankruptcy:

The dischargeable debts will vary from case to case. It’s a good idea to consult with an attorney to find out what debts can and can’t be discharged. In general, unsecured consumer debts such as personal loans, loans from relatives, payday loans, and medical bills may be discharged. In certain situations, secured debts may be discharged if you’re willing to surrender the property backing the debt.

Filing for bankruptcy? Here’s what to expect

Moving on to what you can expect before filing, during the process, and after filing:

Before you file for bankruptcy

Open your mail
“I can’t tell you how many times clients have come in to my office with a big garbage bag full of unopened envelopes,” said Raquel S. White, a bankruptcy attorney based in Prince George’s County, Md. You’ll need to open your bills and understand where you’re at so you can come up with a resolution.

Get credit counseling
A credit counselor can help you decide whether bankruptcy is the right choice or if there are other options you can explore before filing — indeed, credit counseling from a government-approved credit counselor is already a requirement to file for bankruptcy. This session will help you review your money situation, and it suggests alternatives to bankruptcy that you may want to consider.

The length of the session is typically from 60 to 90 minutes and costs about $50. You’ll get a certificate that you must submit. You can check out an approved list of counselors here.

Hire an attorney
You don’t need to file bankruptcy with an attorney, but it is advised. An attorney can guide you through the process, file paperwork and represent you through proceedings. During proceedings, the trustee — the person overseeing your case — can try to squeeze as much money as possible out of you to repay debts. An attorney will work on your behalf to fight for your financial interests. You can shop around for lawyers on sites like Yelp, or riffle through attorney directories such as the one available on the American Bar Association website.

Despite the social stigma of filing for bankruptcy, White told MagnifyMoney that she no longer advertises her services — all of her clients come from referrals. If you feel comfortable, you can ask a friend or relative for a recommendation.

Gather your financial documents
Compile all of your asset and liability statements to give to your attorney. You need to have a list of your creditors, a list of your properties, your income, your debts, and your monthly expenses to complete the filing.

The attorney may ask you to fill out a bankruptcy questionnaire when you meet. The attorney will use information you provide to prepare the documents. Here’s a rundown of the documents needed throughout the bankruptcy process:

  • petition for bankruptcy
  • schedule of assets and liabilities
  • schedule of current income and expenses
  • statement of financial affairs
  • schedule of executory contracts and unexpired leases

You can review some of the forms on the United States Courts website.

During the bankruptcy process

Here’s how the filing process unfolds for Chapter 7 and Chapter 13.

What to expect in Chapter 7
Your attorney will help you prepare and file the bankruptcy petition. There are filing fees, administrative fees, and fees to be paid to the trustee. You may be able to pay the fees in installments; if you don’t have the means to pay the fees and your income is less than 150% of the poverty line, you may be able to have these fees waived.

Filing your petition puts an end to most collection calls and may even stop wage garnishments and lawsuits.

After 21 to 40 days of filing the petition, there will be a meeting of creditors that you attend with your attorney; the trustee and creditors will attend as well. At this meeting, you’ll answer questions about your finances. The trustee assigned to the case will liquidate assets to pay money back to creditors.

What to expect in Chapter 13
You file the petition for a Chapter 13 bankruptcy much like you do with the Chapter 7. There are filing fees, administrative fees, and trustee fees to pay. These fees can be paid in installments, or even waived if you make under a certain amount of income. The petition may stop the collections calls and foreclosure proceedings.

A meeting of creditors typically happens within 21 to 50 days after filing the petition. At this meeting, you’ll be asked questions about your finances. Your proposed repayment plan is filed. Afterward, there’s a confirmation hearing where creditors can raise objections about the repayment plan. Here is where having representation can come in handy. Your attorney will be fighting for your financial interests within the agreement. Adjustments may be made to the proposed plan before it’s finalized.

You make payments to the trustee. They send the money to the creditors on your behalf. There’s a hierarchy of debts that get paid through your repayment plan. Taxes and the costs required to go forward with the bankruptcy, like attorneys fees, are priority. The next debt in the priority hierarchy is secured debt. You need to satisfy payment terms on this debt because the creditor can take the property. The last debt in the hierarchy is unsecured debt, i.e. credit cards. Unsecured debt isn’t backed by collateral and may not be paid in full during the course of the repayment term.

According to White, creditors of unsecured debt can get back around $0.10 per dollar borrowed. At the end of the plan, remaining debts may be discharged as outlined in the agreement.

After filing for bankruptcy

The paperwork is in and you’ve gone to the required meetings — what’s next?

Complete a post-filing debtor education course
Course completion is required before your debt can be discharged. The post-filing debtor education course is one that teaches you how to manage money and credit responsibly moving forward. Like the pre-filing counseling session, this class has to be administered by an approved provider. The course can cost around $50 to $100 and you’ll get another certificate afterward. You may be able to do this course in person, over the phone, or online.

For Chapter 7, your debt will be discharged fairly quickly
The discharge order can take place within 60 to 90 days of the meeting of creditors unless creditors object to the discharge.

For Chapter 13, discharge happens after the repayment plan
The repayment plan agreement may be three to five years and your discharge will come after you satisfy the terms.

What happens to your credit
The credit hit is something you’re probably concerned about with a bankruptcy — but according to White, there’s a bit of good news here. Bankruptcy can have a longer impact on you if you’ve had a long history of nonpayment and credit problems leading up to filing. However, if you have great credit history and then a singular event causes you to file bankruptcy immediately, your credit will take a hit but it may bounce back faster.

“You have to remember, people are looking at your actual credit. They’re going to say, this person was doing great and then they had to file for bankruptcy — something outside of their control had to have happened,” said White. Creditors may be more willing to work with you if they see you’ve had a decent track record until this event. It often takes seven to 10 years for bankruptcy to fall off your report.

Is bankruptcy right for you?

Bankruptcy should be viewed as a final resort because of its financial ramifications. If you have a ton of equity in your home but you have, say, $30,000 sitting on an American Express credit card, White said bankruptcy is probably not the answer — your credit card debt can be resolved without resorting to it.

You can call up your credit card company and try to work out a payment plan. You could also refinance your debt with a balance transfer card or consolidate your debt with a personal loan. If you don’t feel comfortable managing all of this alone, you can contact a credit counselor to help you along the way. There are other resolutions that can come before bankruptcy, especially if the situation isn’t dire.

However, bankruptcy may be a step to consider if your debt is having a larger impact on your livelihood. Here are a few scenarios where bankruptcy could make sense:

If you’re facing foreclosure
Filing Chapter 13 bankruptcy is one way to stop foreclosure. Back payments can be included into your repayment plan so you can save the home. Other debts can be wiped out at the end of the repayment term to give you a fresh start.

If the repo man is calling
Similar to your home, filing bankruptcy could help you stop repossession and incessant collections calls when you’re in way over your head. If you set up a repayment arrangement through Chapter 13, the trustee will collect your payments and distribute to creditors for you so you don’t have to worry about communicating with collections agencies.

If you’ve experienced a life-changing event
Large unmanageable medical bills from an accident or illness could make your financial situation take a turn for the worst. Bankruptcy could be something to consider to get you back on track.

If you experienced a significant loss in income
Losing income unexpectedly can put you in a bind, and long-term unemployment can cause damage that you’re unable to repair. Filing bankruptcy could give you a clean slate.

Don’t Suffer in Silence

If you’re struggling with debt payments, don’t try to hide your bills under the rug. According to White, wage garnishments, bank garnishments, repossessions and foreclosures are all scenarios where you should run — not walk — to see an attorney or counselor for advice.

If you do end up deciding bankruptcy is the right course of action, it’s not the end of the world. The word sounds intimidating, but the steps are systematic and the overview in the post above gives you some insight into how it all works. Be sure to take advantage of the pre-filing and post-filing counseling because you may be able to learn valuable information about how to manage your finances and debt in the future.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Taylor Gordon is a writer at MagnifyMoney. You can email Taylor here


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Debt Validation Letters: What You Should Know

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managing debt

Debt is serious business. Not only should you take your debts seriously for moral and practical reasons, but it’s important to know that there’s an entire industry that revolves around managing, validating and collecting on people’s debts. If you default on what you owe, rest assured that someone will come knocking.

However, it sometimes happens that debt collectors are chasing the wrong people, whether due to identity theft or mistakes in record keeping. That’s why one of the mainstay documents in the world of debt collection is the debt validation letter, which serves as an essential bulwark against errors and fraud in debt collection.

What is a debt validation letter?

Borrowers who have defaulted on debts should keep an eye on the mailbox. Once a debt collector contacts you for the first time — usually via a phone call — they have five days by law to send you a debt validation letter. Sometimes this letter serves as the first communication from the collector. Its purpose is to make sure that the debt in question actually belongs to you.

The rules governing these letters are laid out in the Fair Debt Collection Practices Act (FDCPA), a federal law that defines the limitations on third-party debt collectors who are tasked with collecting debts on behalf of others. The act’s provisions on handling defaulted debt stipulate that debt collectors can’t use “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” This means that they must have validation to support their requests for payment from a particular person. A debt validation letter is often called a “G notice” by those in the industry because the rules for it are laid out in section G of the FDCPA.

The rules are meant to protect consumers from errors caused by mistaken identity and identity theft. While identity theft is the more attention-catching issue, many errors also arise from mix-ups among people with common names — a particular problem with family names from certain cultural groups — and particular naming conventions, such as fathers and sons with Jr. and Sr. suffixes. Mistakes also occasionally occur in the amounts being collected and in record keeping indicating whether or not the debt has already been paid.

The debt valuation letter must contain the following information:

  1. Name of the creditor
  2. Amount to be collected
  3. That the debtor has the right to dispute the debt, which must be done in writing within 30 days
  4. That you can request the identity of the original creditor in writing within 30 days, if it’s different from the current creditor
  5. That once you have disputed the letter in writing within 30 days, no further action can be taken to collect the debt until validation is provided

Item No. 4 on the list is a particularly important thing to understand when debt may be packaged and sold, repackaged and resold, ad infinitum. An example is a letter telling you that you owe a debt to “Midland Credit,” a company you’ve never heard of. Before you become alarmed that there’s been a mistake, request the name of the original creditor from the debt collector. They might inform you that Midland Credit is actually a Capital One card, which will clear up your confusion. It’s important to realize that no collection activity can go forward until they supply that information in response to your request, providing you a reprieve until all uncertainty is cleared up.

How to request a debt validation letter

Debt collectors must send out your debt validation letter within five days of the first time they contact you. This means that you should receive it a few days after that, unless if the debt collector has an incorrect address for you, it may take longer for the letter to get to you (if it arrives at all).

If you don’t receive the letter when you expect it, you still have the right to dispute the debt in question. Imagine you get a phone call from a debt collector, then two weeks go by without a letter arriving in your mailbox. Your best step to take at this point is to call the debt collector and request the letter.

In many instances, the problem is that they are using an old address for you. If that is the case, the debt collector will likely ask to verify your address over the phone. Some debtors who aren’t prepared to deal with the debt may hesitate to verify their address. Certainly no one can force you to provide your current address to the collector, but withholding it can negatively impact you down the line when you’re finally forced to account for the debt.

“Some people feel they don’t want to give their address and be harassed,” said Joshua Cohen, a consumer protection attorney at Cohen Consumer Law. “If that’s how you feel, then you should go to a consumer attorney to know all your rights. There’s nothing worse than going in front of a judge and saying, ‘I didn’t get my letter.’ And then having the collector say, ‘We didn’t have the right address and he wouldn’t verify the address.’”

Keep in mind that it’s good practice not to supply any personal information over the phone until you have verified that the party you’re talking to is a legitimate debt collector.

Responding to a debt validation letter

If you would like to ask for validation of the debt after receiving a debt validation letter, it’s a good idea to use a template to make sure you’re expressing yourself clearly in a way the debt collectors will understand. Send the letter to the debt collector at the address provided in the debt validation letter. There are many templates for such letters available online, including some by the Consumer Financial Protection Bureau (CFPB).

The letter you write will depend on your response to the debt validation letter. For instance, you will write a different letter if you believe the debt is not yours versus if you simply need more information before you can figure that out. If you believe the debt is not yours, though, remember that debts are bought and sold, so the fact that you don’t recognize the creditor’s name does not mean there has been a mistake. It’s best to find out all information possible before you conclude that you’re being held responsible for someone else’s debt.

The CFPB advises that you make sure to find out all of the following information, some of which should be provided in your debt validation letter and some of which you may have to ask for in your response:

  • The name and contact information of the debt collector
  • The total debt amount, including any fees such as interest
  • The reason for the debt and the date it originated
  • The identity of the original creditor
  • Any information the collector is using to justify their conclusion that it is you who owns the debt

It is a good idea to keep a copy of this letter and to send it via certified mail with a return receipt, so you have a paper trail of your communication with the debt collector.

What happens after you’ve sent a validation request?

Once you’ve sent your validation request, the debt collector does not have a deadline to respond. It’s a common misunderstanding that the collector only has 30 days to respond to a validation request, but in truth, they can take as long as they want. That open-ended time frame is a benefit for debtors since the debt collector can’t contact you during the period that they’re working to validate the debt.

“If they take six months to validate, that’s six months they can’t bother you,” said Cohen. “The only thing they’re allowed to do is to say, ‘We’re not collecting this debt anymore.’”

Relinquishing the debt collection altogether does indeed happen. As a general rule, if the debt collector doesn’t respond to the validation request within 90 days, then you’ll likely never hear from them again.

If they do respond, they will provide some amount of information, but often not as much as the debtor wants or has asked for. Unfortunately, the debt collector is not required under the FDCPA to send the debtor a full accounting of the debt, the promissory note or the full agreement.

Many consumers assume that debt in collection cannot go forward unless the debt collector can provide the promissory note, but that is not the case. The debt collector is permitted to submit validation of the debt that basically amounts to a statement from the creditor saying you, the debtor, owe the amount in question.

Once the debt collector has responded to your request for information, they are allowed to resume collection efforts. If you still doubt whether the debt is yours upon receiving whatever information the debt collector provides, you can take action to try to clear up the confusion. If the debt collector can’t provide proof, you can try calling the creditor directly at the contact number provided on your credit report. There are times that a debt collector will decide not to pursue your debt at this point, or they may keep pursuing it until you can definitively prove it’s not yours.

“Debt collectors want to do their job the right way,” said Cohen. “Despite what people think, they want to do it the right way. The more proof you send about the debt not being yours, the better they can do their job and talk to the creditor about not making you pay the note.”

However, if you aren’t able to get this proof and you feel confident the debt isn’t yours — whether you’ve been a victim of identity theft or there’s been a mistake — you should go to a consumer attorney. You can dispute the debt with the creditor and with the credit reporting agencies, which an attorney can help you with. The problem may resolve itself, but if it doesn’t, you’ll probably have to proceed to litigation.

“If the debt isn’t legitimate, the debt collector is the least of your problems,” noted Cohen.


Debt validation letters bring a sense of order to the process of debt collection and provide important protections for those who are being asked to pay large sums by debt collectors.

Those who owe a debt but can’t pay will need to deal with that fact sooner or later; the receipt of a debt validation letter may be a good motivator to contact a consumer attorney to understand your options. Looking to an attorney is also a good idea if you’re being pursued for a debt you’re certain isn’t yours. The debt validation letter will be one of the first indications that something fishy is going on.

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The Truth About Debt Forgiveness

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debt forgiveness

Despite your best efforts, you sometimes fall behind on debt payments. While you work to steady your finances, there may be options available to forgive, reorganize or reduce your debt load.

Some creditors, such as a mortgage lender or student loan servicer, might work with you to revamp your loan or repayment schedule, or you could qualify for federal relief programs. But, in most cases, it may be difficult to have your entire outstanding debt forgiven, even if you file for bankruptcy.

Since each type of loan or debt has its own circumstances and prospects for debt relief, it is advisable to contact your creditor or lender as soon as possible to discuss options.
In this article, we will discuss the most common types of debt, as well as the possibilities for debt forgiveness.

Credit card debt forgiveness

If you find yourself with a growing credit card balance and interest charges, the stress can be overwhelming. Sometimes making the minimum payments is difficult or impossible. While credit card debt forgiveness can be rare, there are some options to manage or reduce your debt.

If you’ve fallen behind on your credit card payments, a good first step is to seek the advice of a reputable credit counselor. They can help you organize all your outstanding bills and finances. They can also help craft a manageable payment plan. The Federal Trade Commission (FTC) has tips to find a reputable credit counselor.

When your account is more than six months past due, a credit card company may refer the case to a collections agency. Collectors will make repeated attempts to obtain all, or some, repayment from cardholders. If that’s unsuccessful, they may file a lawsuit against the customer and could garnish wages to recoup some funds.

But you have some options if you discover you cannot repay your credit card debt.


A potential — but drastic — option to resolve credit card debt is to file for bankruptcy protection. Under federal law, there are two types of bankruptcy for individuals: Chapter 13 and Chapter 7. An individual could discharge some types of outstanding debt, including credit card balances, with either option, subject to court approval. Consumers considering this option should consult with an experienced bankruptcy attorney to review options and eligibility.

Chapter 13 bankruptcy is a court-approved plan to repay outstanding debt. If you complete a repayment program, which runs three to five years, some or all of your remaining debt can be discharged. To qualify, a debtor must follow an established process that includes petitioning the court and developing a plan with a court-appointed trustee and creditors. All debts are paid monthly by a trustee, who distributes funds to creditors.

One of the main benefits of Chapter 13 is that, once a petition is filed, it freezes all collections and foreclosure proceedings, allowing a debtor to retain their home and stop any other debt collections so long as they are included in the plan.

Alternatively, Chapter 7 involves liquidating an individual’s assets, often including a home, and using the proceeds to pay off creditors. Your outstanding debts are either settled by this liquidation or discharged. But since you are not paying your outstanding balances, your ability to secure future loans and re-establish your credit can be damaged, making this a less attractive option for individuals seeking future lending options.

Repayment plan

You may be able to arrange a payment plan with your credit card companies, which would avoid sending your account into collections. Some credit card companies suggest that consumers contact them, outline their difficulties and suggest a plan for repayment.

If you fail to pay your debt for 180 days, a creditor may write that off as a loss. That action could damage your credit score, and you’ll still owe the debt. But debtors may still be willing to negotiate with you, the FTC states on its website.

Using a debt settlement company

Another option is working with a debt settlement company — typically a for-profit firm — that negotiates with the lender and agrees on a lump-sum payment. These services typically come with a fee and may require an individual to deposit a monthly amount into a special account that will be used to pay off debts. The FTC cautions that consumers make careful consideration before contracting a resettlement company. The agency advises that homeowners should make sure they can afford the monthly savings payments. If you fall behind, you’ll be further from your goal of repayment and may accumulate more late fees and interest, along with added damage to your credit. It also advises homeowners to research the settlement company by searching online for complaints or with your state attorney general’s office.

If you work with a debt settlement company, the FTC notes that money that is transferred into a savings or escrow account is your money, should be in your name and is to be used at your discretion, including any interest that accumulates. Also, the FTC says that settlement companies should only collect fees after the repayments are complete.

Pros and cons of credit card debt forgiveness


You could reduce outstanding debt, negotiate a more manageable repayment plan or agree on debt settlement. By mitigating your outstanding debt, you can decrease the outstanding balance and avoid incurring additional interest. Also, by keeping your accounts from going to collections proceedings, your credit score may take a lighter hit and you can avoid an escalation of collections proceedings.


In some cases, the collections agency and credit card company may agree to seek a settlement with the debtor and accept a portion of the debt, but there could be ramifications. If the rest of the debt is discharged, the IRS may consider the forgiven amount a gift and require you to pay income taxes on that amount. With both Chapter 13 and Chapter 7 bankruptcy, the filing will appear on your credit report, which could impact the terms and rates for future loans and credit.

Also, costs associated with discharging or settling debt can add up. Bankruptcy involves court and attorney’s fees. Settling debt will require you to pay a potentially large chunk of money. There are typically fees associated with using a settlement agency, too.

Student loan debt forgiveness

Depending on your circumstances and the loan you have, it may be possible to earn forgiveness or discharge on your student loans, but it is difficult. Student loans are typically subject to strict repayment terms, even if you don’t graduate or can’t find a job.

Student loans are available through the federal government and private financial institutions, including banks and credit unions. If you’re having difficulty making payments and are seeking some relief — whether you have public or private loans — you should start by contacting your loan servicer to discuss your circumstances and options.

Even if you file for bankruptcy, it is not guaranteed that your student debt will be discharged.

If you have federal student loans, some circumstances could entitle you to forgiveness or discharge, but the requirements are usually stringent. These situations or programs, subject to eligibility, could include the following.


If a borrower dies or the student who the loan was taken out for dies, a federal student loan will be discharged.

Total and permanent disability (TPD) discharge

This must be documented by a physician, the Department of Veterans Affairs or the Social Security Administration. It must establish that you are “unable to engage in any substantial gainful activity due to a physical or mental impairment,” according to Federal Student Aid’s website. To qualify, individuals must submit a TPD application, which is subject to review and approval.


If an individual files for Chapter 7 or Chapter 13 bankruptcy and proves to the court that repayment would be an undue hardship on themselves and their family, they may be eligible to discharge the entire remaining loan balance, a portion or negotiate to a lower interest rate or revised repayment schedule.

School closure

If the school you attend or recently attended (usually within 120 days) closes, you may be able to discharge some or all of your federal student loans. In this instance, contact your loan servicer for help.

Public Service Loan Forgiveness

This highly anticipated federal loan relief program is tied to employment, but it has gotten off to a rocky start. The Department of Education set aside $350 million to provide tax-free debt relief to graduates who work in government or public service jobs, but the program has detailed eligibility requirements.

While the program holds promise, the review process has been slow. Only a handful of claims have been paid out. Since fall 2017, nearly 30,000 applications for forgiveness have been processed, but only 96 borrowers have had debt discharged. The program is so mired in problems that the federal government put in place a temporary initiative to try to correct it.

Loan modification

Another option for borrowers with outstanding federal or private loans could be modified repayment plans, which may allow for fixed or graduated payments over a period. Contact your loan servicer to discuss potential options.

Pros and cons of student loan forgiveness


If you qualify for some federal programs, including public service work, you could reduce or discharge your remaining student loans. If you face hardships, such as disability or bankruptcy, you may also be able to obtain forgiveness on some or all of your loans.


Similar to debt forgiveness on credit cards, some types of student loan discharge could impact your ability to obtain future loans. If you’ve missed payments and if your loan has gone into collections, that will impact your credit score. If you do have an outstanding balance discharged, you may have to pay income tax on the forgiven amount. There are a few exceptions to the canceled debt being taxable, including insolvency or bankruptcy. If debt is forgiven, some types of student loan discharges could be subject to taxation.

Mortgage forgiveness

To keep your home and avoid foreclosure, you need to pay your mortgage on schedule. But personal hardships, such as job loss, illness or divorce, can sometimes make it difficult for a homeowner to make payments. If you get behind, it may be possible to negotiate a repayment plan with your lender or obtain some form of federal or state mortgage assistance.

Here’s a look at different ways to manage mortgage debt.


In some cases, it may be advisable for a homeowner to file for bankruptcy protection, either by declaring Chapter 13 or Chapter 7 bankruptcy. When you file for either Chapter 13 or Chapter 7, the petition halts collections against most of a debtor’s property, including foreclosure proceedings.

But there are important differences: Under a court-approved Chapter 13 plan, the homeowner is approved to pay back an agreed-upon amount of outstanding mortgage payments and resume a normal schedule. Under Chapter 7, the bank may still opt to foreclose on a home as a way to liquidate assets and repay creditors, including the mortgage lender.

One advantage of Chapter 13 is it gives homeowners an opportunity to avoid foreclosure by catching up on overdue payments with a payment plan, the U.S. Courts website notes.

Mortgage relief programs

Depending on where you live, state or federal programs may exist to provide mortgage assistance and relief. To assess the programs, homeowners should contact a Department of Housing and Urban Development-approved agency in your area. It can help you determine your eligibility for any programs that match your location and circumstances, as well as other foreclosure avoidance options. To assist homeowners, HUD provides a searchable database on its website to refer homeowners to nonprofit agencies by region qualified to provide services.

Some federal programs and options for homeowners include:

Home Affordable Refinance Program (HARP)

This program, set to expire at the end of 2018, allows qualified candidates to refinance with lower rates or more favorable terms. Homeowners must be up to date on their mortgages, have little or no equity in their property and have a loan from Freddie Mae or Fannie Mae that originated on or before May 31, 2009.

Hardest Hit Fund

In 2010, the federal government created the Hardest Hit Fund and allocated money to 18 states and the District of Columbia. The federal government has allocated billions to the program, which is set to expire at the end of 2020. Funds can be used for mortgage repayment assistance, to pay down second mortgages, relocation assistance or to reduce your mortgage balance.

Servicemembers Civil Relief Act

Under this law, the federal government offers some protections and programs for active-duty service members, as well as their dependents, who may experience difficulty paying their mortgages.

Mortgage modification

Homeowners with regular income to consistently service their loan may be able to work with their lenders to revise the terms of their loan. That could result in a modified payment schedule or new terms.


If you don’t qualify for a mortgage assistance program and you’re unable to negotiate a modification with your lender, you may be able to propose a forbearance period, which allows you to take a break from making your regular payments, such as a six-month respite. The difficulty with forbearance can be a homeowner’s ability to catch back up because, when the break is over, they’ll need to repay the outstanding mortgage payments and resume a normal payment schedule.

Pros and cons of mortgage debt forgiveness


If you modify your mortgage debt, you’ll likely be able to remain in your home. Also, if you qualify for a federal mortgage assistance program, you may receive funds to help pay your mortgage. If you negotiate a modification with your lender or even a reprieve in payments, you may be able to reorganize your finances and get back on solid footing.


To avoid foreclosure proceedings, you’ll need to stick to whatever terms of your federal relief plan or modification schedule you negotiate with your lender. If you fail to comply, including late or missed payments, you could be subject to foreclosure or financial penalties from your lender.

Tax debt forgiveness

If you owe more in taxes to the IRS than you can afford to pay, you may be eligible for some debt forgiveness or relief.

Individuals should contact the IRS or discuss their situation with a tax professional. They can also contact the Taxpayer Advocate Service, an independent service that works with the IRS to help taxpayers resolve problems. Another option is to contact a low-income taxpayer clinic in your area or consider the IRS’ Fresh Start Program.

Here are some things to consider for your tax debt.

Offer in compromise

The IRS has something called offer in compromise, which is an agreement between a taxpayer and the IRS to settle outstanding taxes for less than the full amount owed. To be considered, you need to submit an offer that the IRS finds realistic given your income and assets. Once you submit your offer, the IRS investigates and determines if it will accept it. Typically, individuals who qualify have very low or no income.

To be considered, taxpayers must have filed all their required tax returns. If you’re in bankruptcy proceedings, you can’t take part in the program. The program requires a $186 application fee.

As part of your offer, you need to propose a repayment schedule, which can be a lump sum or monthly installments. If you don’t have enough cash to make the payments, you’re still required to stick to the plan, and you may have to borrow money or sell assets to stay on schedule. The IRS’ website offers more details on the program and the application process.

Installation agreements

For taxpayers who owe up to $50,000, the IRS offers monthly direct debit payments for up to six years to resolve outstanding debt. To qualify, the IRS will ask for some financial information, and taxpayers must sign up through the IRS’ online payment tool. If you need a longer period to pay off the debt, the IRS will likely ask for more detailed financial information.

If you owe less than $100,000, it may also be possible to arrange a short-term repayment plan. For both options, the IRS offers more information. The application is on its website.

Pros and cons of tax debt forgiveness


A revised tax payment plan can take pressure off you and help you stay current on your debts. If the IRS accepts your offer in compromise, you may be able to lower your outstanding tax debt. If you have a federal tax lien on your property, you may be able to have the lien discharged or withdrawn once you repay your debts. After the repayment is complete, the IRS removes all liens against you, which can improve your credit score.


An offer in compromise sounds like a great option, but there is a lot of fine print. The program has stringent eligibility standards, and investigators dig into your finances.

Also, the IRS can only collect taxes for the past 10 years. But if you start an offer in compromise application, the clock stops, possibly dragging out debt that might expire. Also, any collections that started before the application, such as wage garnishment, can continue. The process of investigation and approval can take a year or more. Finally, if you are approved, you must be compliant with all taxes and payments for five years.


If you’re facing mounting debt from any of these loans, it is important to get organized and understand your debts and evaluate your ability to make payments. You should also contact your lender or creditor and alert it to any change in circumstances or hardships. You should inquire about options to modify, reorganize or forgive your outstanding debts.

Financial counselors, including credit counselors, tax advisers and housing counselors, can often offer assistance at no or low costs to help manage debt and come up with management plans. If you’re able to hire a professional, a tax adviser, bankruptcy attorney or tax attorney may also be able to help you sort out your circumstances and options.

The bottom line is that while debt forgiveness may be rare, there are many resources available to consumers looking to manage and restructure their debts.

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Debt Avalanche vs. Debt Snowball: Which Payoff Method Is Right for You?

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debt avalanche vs. debt snowball

You have several debts piling up, and you’re starting to worry you’re losing control over them. You have a car loan, student loan debt and two mounting credit card balances that are only getting higher with each passing month.

You’ve heard of two primary methods for paying off debt: the debt avalanche method and the debt snowball method. Both are effective ways to eliminate debt. But which one is right for you? Here’s everything you need to know about the two methods of debt elimination.

Debt avalanche vs. debt snowball: What’s the difference?

Both forms of debt elimination involve paying off debts one at a time. The primary difference between the two forms of debt elimination is which debts are paid off first.

With the debt avalanche method (also referred to as debt stacking), you pay off the debt with the highest interest rate first. With the debt snowball method, which was popularized by Dave Ramsey, author of “The Total Money Makeover” and radio personality, you prioritize the debt with the lowest balance.

Below, we’ve explored the nuances of each method so that you can figure out which one is ideal for you.

How does the debt snowball method work?

The debt snowball method involves taking a look at all your debt balances and paying them off from smallest to largest. You still pay the monthly minimum balance on all your debts, but put an extra, predetermined amount of money each month toward the smallest debt.

“Once you pay off the lowest balance loan, you would take that extra money and move it toward the second lowest balance,” said Forrest Baumhover, a certified financial planner at Westchase Financial Planning in Tampa, Fla. “At some point, you snowball. All of these principal payments that you were paying toward — all of these tiny loans or credit card balances — are now focused on the last remaining one.”

Who is it good for?

People who benefit from regular motivation. Consumers who opt for the debt snowball method tend to see success due to the “little wins” that go with paying off small debts quickly.

“If the difference in interest rates is not that much in terms of the overall savings, I might tell somebody to go with the snowball method just because they get to see progress sooner,” said Luis Rosa, a certified financial planner with Build a Better Financial Future in Henderson, Nev. “They might have smaller balances that they can get rid of in a month or two, and then they continue to be motivated because they can see some progress at the very beginning of the plan.”

The debt snowball method can also be beneficial for people who have a significant amount of debt in various forms. “The way I see it is if you’re starting with a pretty big number, then a lot of little victories will help you along the way,” Baumhover said.

Does it save you money?

Not necessarily. The debt avalanche method typically makes more sense as you save money on interest. But Rosa and Baumhover said people are often better able to stick to the snowball method because of the satisfaction of “little wins.”

Research from Kellogg School of Management at Northwestern University showed that even though the avalanche method typically leads to more savings, consumers who opt for the snowball method are more likely to eliminate all their debt.

Breaking down how it works

Rosa offers this example:

Debt TypeMinimum PaymentCurrent PaymentBalanceInterest Rate

Car loan




7.99% APR

Personal loan




5% APR

Credit card No. 1




17.99% APR

Credit card No. 2




15% APR

If a consumer only made the monthly minimum payments on the above debts, it would take them 112 months to pay them off, Rosa said. Adding an extra $200 each month would cut that to 44 months.

Assuming the consumer puts an additional $200 per month (on top of minimum payments) toward paying off their debts from smallest to largest, they will have paid off the personal loan by December 2018 if the above scenario begins in October 2018. With the debt avalanche method, the personal loan will not be paid off until August 2019.

How does the debt avalanche method work?

If you opt for the debt avalanche method, you will continue making the monthly minimum payments on all your debts, but you will put your extra monthly allotment toward the debt with the highest interest rate, not the debt with the lowest balance.

“The key differentiator between the avalanche and the snowball [is that] the avalanche is going to be based on the highest interest rates first,” Rosa said. This means that you’ll likely focus on higher-interest debts, such as credit cards, before lower-interest debts, such as student loans.

Who is it good for?

People who are intrinsically motivated and who aren’t as concerned with the “little wins” that go with the snowball method.

“The avalanche method is typically known to be the most efficient mathematically,” Rosa said. “But sometimes the thing that’s best mathematically isn’t the best for you, because your card with the higher interest rate might be your higher balance card, and you might not see any progress for quite a bit.”

Does it save you money?

Typically, this debt repayment method saves you money, Rosa said. Because you are paying off the debt with the highest rate first, you will see more savings in interest paid.

Breaking down how it works

The benefits of the avalanche method can be seen using the same example as above:

Debt TypeMinimum PaymentCurrent PaymentBalanceInterest Rate

Car loan




7.99% APR

Personal loan




5% APR

Credit card No. 1




17.99% APR

Credit card No. 2




15% APR

If a consumer puts an extra $200 toward their debt each month and pays it off in 44 months (like the above example), they will not have the quick “win” that accompanies the debt snowball method, but will instead save slightly more on interest. The debt snowball method, in this case, has an overall interest savings of $6,496.82, while the debt avalanche method has an overall interest savings of $6,669.64.

Which debt repayment method is best for you?

Both methods can be beneficial strategies for paying off debt. What it typically boils down to is a person’s mindset and long-term goals.

What does Baumhover typically recommend?

“It depends on the type of client that I’m working with,” he said. “For people that need to tick off little milestones along the way to know that they’re actually making progress, there’s a powerful emotional aspect to [the snowball method]. But when you run the numbers, you do pay a little bit more in interest.”

For people who have intrinsic motivation and don’t need “little wins” to stay on track, the avalanche method might be a better option. “If someone really has a focus on just minimizing the amount of interest, then the debt avalanche would probably be what they would want to do,” Baumhover said.

To figure out which method is ideal for your specific financial situation, you can use this calculator.

5 ways to prioritize and pay off your debt

Now that you know the difference between these two debt payoff methods, it’s time to get started. Here are the first steps you should take once you’ve decided to tackle your debt.

1. Review your debts

Rosa said the first thing people should do is list out every single debt they have by name, APR, balance and minimum payment. Then, he suggests using a free online calculator, which allows you to enter all your debt information and compare different debt elimination methods.

This step is crucial for success. “The debt avalanche vs. the debt snowball, neither of those is going to work for someone who’s not willing to take a look at their whole picture,” Baumhover said.

2. Take a look at your spending habits

Once you’ve identified all your debts, take a look at your spending habits so that you can figure out how much money can go toward your debt elimination plan each month. “[People] should really try to set a realistic expectation of what they’re willing to live on in terms of their budget,” Baumhover said.

The most important thing is to be realistic. Don’t say, “I’ll put an extra $1,000 toward debt each month” without actually taking a hard look at your finances to see if this is possible. You’ll be setting yourself up for failure, Baumhover said.

“It’s kind of like trying to lose 50 pounds,” he said. “It’s not realistic to do it in a month, but if you say, ‘Maybe I need to do it over a year and a half, and I can afford to lose 3 pounds a month,’ then that’s a little bit more sustainable.”

3. Decide which debts you’ll prioritize

This is the point at which you should figure out which debt elimination plan is ideal for you. Are you the type of person who would benefit from small wins each month? Does the idea of eliminating three of your eight debts quickly appeal to you and sound motivating? If so, the debt snowball method is likely the right option for you.

If you have a history of diligence and determination and don’t think the “little wins” would do much for your motivation, then the debt avalanche method might be a better option for you as it’ll lead to more savings.

4. Get advice from an expert

If you’re struggling to prioritize and pay off your debts, consider contacting a financial expert such as a certified financial planner or a nonprofit credit counselor. They can help you take a big-picture look at your finances and offer advice on which strategy is better for you.

5. Stop racking up debt

Rosa said he often sees consumers begin a debt elimination plan and continue racking up credit card debt. This can ruin a debt elimination plan.

“Some people continue to use the cards,” Rosa said. “For example, they might be going after rewards points. The system only works if you no longer use the cards.”

But Rosa added that you shouldn’t necessarily close all your credit cards since this can have an impact on your credit score.

“If you have a credit card from 10 years ago, a major card like MasterCard, Visa or AmEx, you might not want to necessarily close it, even if you paid it off,” he said. “Just continue to use it occasionally, like for gas, [and] pay it off at the end of the month so that you keep that history.”

Another way to pay off your debt: Debt Consolidation

The avalanche and snowball methods aren’t the only ways to manage your debt.

You could take out a personal loan to combine your existing debts. In doing so, you’ll get to make just one monthly payment on a loan with a lower interest rate and different repayment term. This is called debt consolidation, and it’s another repayment strategy that could save you money on interest.

A debt consolidation loan could help you get out of debt faster by reducing the total interest you pay over time. You also get to choose a new repayment term on your debt. So if you want to aggressively pay down your debt and save more money on interest, you could simply choose a shorter repayment period. Compare up to five offers in minutes when clicking “see offers” below. Note: Clicking “see offers” below does not affect your credit.



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Regardless of the repayment strategy you choose, you’re taking a step in the right direction by deciding to take control of your finances and eliminate your debt.

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Jamie Friedlander
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When Should You Consider Bankruptcy & How to File

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bankruptcy guide

Updated – November 14, 2018

If you’re drowning in debt and having trouble keeping up with your payments while still handling your living expenses, you may have at least begun to consider filing for bankruptcy.

Filing for bankruptcy is meant to give people in serious financial distress some relief and a chance to start over. By the time most people get to that point, they’ve probably tried many other methods for managing their debt.

Bankruptcy certainly has its benefits, potentially allowing you to wipe the slate clean and start anew.

But there are a lot of things to consider before making a decision, from the negative consequences of filing to whether bankruptcy would even provide relief for your specific situation.

“For most folks that come in, this is the last option,” said John Colwell, a San Diego, Calif.-based bankruptcy attorney and President of National Association of Consumer Bankruptcy. “I know I’m like the dentist. People really don’t want to be sitting in front of me.”

This is a big decision that requires a significant amount of due diligence before moving forward. While it’s important not to take bankruptcy lightly, it may be the best way for people to get back on their feet.

So how do you know if bankruptcy is the right way to relieve your debt? In this post, we’ll go over some of the key points to help you get started.

The basics of filing for bankruptcy

Bankruptcy is a legal procedure to discharge debt built up by someone who either will not be able to repay those debts or does not have the means to repay debts owed currently. There are two notable forms of bankruptcy: Chapter 7 and Chapter 13.

In a Chapter 7 bankruptcy, a debtor’s nonexempt assets are sold and the proceeds are used to pay debts. An individual must pass a means test before they can file a Chapter 7 bankruptcy to ensure that the court would not be abusing the bankruptcy law by granting one. We will talk more about the means test below!

A Chapter 13 bankruptcy is a “wage earner plan.” To qualify, an individual must have a steady income. This allows them to pay back all or part of their debts by developing a repayment plan. The plans last between three and five years.

In most cases, bankruptcy does not protect you from any future debts incurred. It also will have an effect on your credit score and remains on your credit report for 10 years with Chapter 7 and seven years with Chapter 13. In a Chapter 7 bankruptcy, you may lose assets such as your house or your car depending on how much equity, if you’re able to exempt your equity and if you’re current on your payments.

Are You Eligible?

As stated above, there are two types of bankruptcy for individuals: Chapter 7 and Chapter 13.

There are some significant differences between the two programs, but here’s a high-level summary:

  • Chapter 7 allows you to completely discharge your debts, with some exceptions (such as student loans, certain tax obligations, and child support). But you may be obligated to sell some of your property to settle some of your debt obligations.
  • Chapter 13 allows you to create a payment plan to repay some or all of your debts over a 3-5 year period. So your debts are not discharged, but you will also not be obligated to sell any property in order to make your payments.

Either one could be more or less beneficial depending on the specifics of your situation. But the very first question is whether you qualify for either one, and each has its own set of criteria.

Chapter 7 bankruptcy has what’s called the “means test”, which is meant to ensure that only people who truly can’t afford their debt payments are allowed to file. There are two different wants to pass it, and therefore qualify for Chapter 7 bankruptcy:

  1. If your monthly income is less than the median monthly income in your state for your family size, you pass. You can find current median income numbers by family size here.
  2. If you don’t pass #1, you’ll have to go through a complex calculation to see whether your disposable income after subtracting out certain expenses is enough to satisfy your debt obligations. At this stage it would probably be best to talk to a professional who could help you navigate the process.

Eligibility for Chapter 13 bankruptcy is a little more straightforward. Here’s how it works:

  1. As opposed to Chapter 7, you need to prove that your disposable income is high enough to afford a reasonable repayment plan.
  2. Your secured debt (mortgage, auto loan) can’t exceed $1,149,525, and your unsecured debt (credit cards, medical bills, etc.) can’t exceed $383,175.
  3. You must have filed both federal and state income taxes each of the last four years.

There are some other requirements for each, but those are the major ones. Assuming you qualify for at least one of them, there are a few other things to consider.

What Kinds of Assets and Liabilities Do You Have?

Depending on the specifics of your financial situation, one type of bankruptcy may be preferable to the other. Or it may be that neither would actually be particularly helpful.

As an example, neither type of bankruptcy would likely help you all that much if your primary debts are student loans. They wouldn’t be discharged in Chapter 7 bankruptcy. And while your required payments might be reduced over the 3-5 year repayment period in Chapter 13 bankruptcy, once that was over you would have to continue paying them back as usual.

The type of assets you own and their value also matters, particularly if you’re going through Chapter 7 bankruptcy. During that process, your bankruptcy trustee is allowed to sell your property in order to settle your debts, but certain property is protected.

For example, your house and car are protected up to certain limits. Employer retirement accounts like 401(k)s and 403(b)s are fully protected, while IRAs are protected up to about $1 million. But other accounts, such as checking, savings, and regular investment accounts may not have the same protections.

The rules here vary by state, and having a strong understanding of which assets you might be able to keep and which you might end up losing will help you make your decision.

When to file bankruptcy

According to Colwell, filing for bankruptcy needs to be “worth your while,” meaning it should give you relief from your debts to ensure you don’t find yourself in a similar situation in the near future. That means that if you have major expenses that you are about to incur, you should wait to file until after you have incurred them so they can be included in the bankruptcy settlement. This is especially important when it comes to filing bankruptcy due to medical bills.

However, with a Chapter 13 bankruptcy, you can seek court approval to include new debt that you’ve incurred post-filing into your payment plan.

In general, though, there are aspects of your financial situation that signal when it’s time to consider bankruptcy. If you can’t pay your bills (and you don’t see that changing anytime soon) and your debt continues to pile up, bankruptcy is probably worth considering.

Here are other red flags to look out for:

  1. Debt collectors are calling. If you’re behind on your bills to the point that you’re hearing from debt collectors, it may be time to consider bankruptcy. This is especially true if you’re being sued by debt collectors.
  2. You’re in danger of losing your home. If you’re at risk for losing your house to foreclosure, filing bankruptcy can help you get caught up on your payments and keep your home. With Chapter 13, you’re given the chance to keep your home by creating a plan to repay your outstanding debt.
  3. You’re using loans to pay your bills. Using short-term high-interest loans such as payday loans can get you in trouble. With these loans, people borrow against their next paycheck. “People get caught in the trap and it starts rolling over from paycheck to paycheck to paycheck,” said Colwell. Title loans are another form of small loan where a vehicle is used as collateral; these loans can be problematic for someone already in financial distress.
  4. You’re liquidating your retirement assets. Retirement money is exempt in a bankruptcy, meaning trustees can’t use it to repay lenders. So in most cases, it doesn’t make sense to burn through your retirement money to pay debts. “I hate that with a passion,” Colwell said. “It’s your retirement money, what are you doing?!”

How to file for bankruptcy

Most initial consultations with lawyers are free of charge. At these meetings, you’ll walk a bankruptcy attorney through your financial situation and your reasons for wanting to pursue bankruptcy.

There are also ways for individuals to file for bankruptcy on their own, known as filing pro se. Court employees and bankruptcy judges can’t give out legal advice to people in their courts, so if you go that route, you will be on your own. To file yourself, you should be familiar with the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and the local rules of the court.

Unless you have a strong understanding of legal issues and have the time to handle the paperwork, it’s probably best to use a lawyer — that’s because making a mistake can impact your rights, according to the U.S. Courts. You’ll also need the capacity to fill out a lot of paperwork, Colwell also noted.

If you use an attorney, they should be able to provide services including:

  • Advising you on whether to file a bankruptcy petition and under which chapter to file.
  • Telling you whether your debts can be discharged.
  • Advising you on whether or not you will be able to keep your home, car, or other property after you file.
  • Advising you of the tax consequences of filing.
  • Advising you on whether you should continue to pay creditors.
  • Helping you complete and file forms.

How to file Chapter 7 bankruptcy

A Chapter 7 bankruptcy involves the sale of all of your nonexempt assets to pay back your creditors. This is the most common kind of personal bankruptcy, accounting for more than 60 percent of all non-business bankruptcies in 2017. The process usually takes about four to five months.

Filing for Chapter 7 will wipe out your allowable debt (such as as credit card, medical and personal loan debt), but the bankruptcy will remain on your credit report for up to 10 years.

The first step is to take a mandatory credit counseling course from a government-approved organization, within 180 days of your filing date. Upon completion, you can decide if you still feel it appropriate to move forward with a bankruptcy, and move on to the next step.

At this point, you, or your attorney, would file your petition and other additional forms with the court. Along with your filing petition, the forms include a list of your creditors, a summary of your assets and liabilities, lists of property (both exempt and non-exempt) and any documentation needed for your “means test.” There are also companies that will send you a packet of all relevant documents, for a small fee.

At this point, you will be subject to the “means test.” If the debtor’s current monthly income is more than the state median, the means test is applied. Abuse is determined if the debtor’s monthly income over five years is either more than $12,850, or more than 25% of the debtor’s nonpriority unsecured debt of at least $7,700.

A trustee is then appointed to review the paperwork and take nonexempt property; you will also have to submit your most recent tax return to the trustee.

The next step in the process is a meeting of creditors, known as a “341 meeting.” At the meeting, you will answer questions about your finances and bankruptcy forms under oath. Creditors are allowed to attend the proceedings if they choose.

It is now decided if you are eligible to file for Chapter 7. At this stage, secured debts are determined: they can be repossessed by the creditor, you can redeem it by paying back what it’s worth or you can reaffirm the debt, which removes that debt from the bankruptcy filing and allows you to pay it back when the bankruptcy is over.

You will have another course to attend that will include information on developing a budget, using credit and managing money — afterward, your debt will be discharged.

Cost: A Chapter 7 bankruptcy needs to be paid for upfront by the debtor. It is generally a flat rate and may be contingent on the complexity of your debt structure as well as the market in which the attorney is operating.

How to file Chapter 13 bankruptcy

A Chapter 13 bankruptcy will last between three and five years, from start to finish. These processes are long and complex, so it’s strongly recommended that you use a lawyer. If you have a steady income, Chapter 13 bankruptcy allows you to keep property, like a house or car, that you might otherwise lose in Chapter 7. Chapter 13 develops a three-to-five year repayment plan for your debts.

The first step is to take a credit counseling course. Afterward, you or your attorney will prepare and file a bankruptcy petition and paperwork that includes a list of your creditors, a summary of your assets and liabilities and your Chapter 13 repayment plan; you will also need to provide your most recent tax returns.

The court will later appoint a trustee to administer your case and a stay on collections will take effect — this means that certain creditors won’t be able to proceed with lawsuits against you, call you for repayment or garnish your wages. You’ll begin making payments for a month after you file the paperwork. In addition, like Chapter 7, Chapter 13 also requires a 341 meeting.

You or your lawyer must attend a confirmation hearing where objections to your plan either by the trustee or the creditors will be addressed and eventually your plan for repayment will get confirmed.

Your creditors will also file proof of claim so that they can get repaid; it is at this point that you can object to the claim if you feel it is unfair.

The repayment period begins when you start to comply with your plan’s requirements and payments; this is the longest portion of the bankruptcy. If required by your plan, you may also have to submit documents to the court like income and expense statements.

Exactly as in Chapter 7, you’ll have another course to attend that goes over budgeting, using credit and managing money. Afterward, your debts may be discharged and your case closed.

Cost: There are two ways an attorney can charge you for handling your Chapter 13. It may be a “no look” fee, a flat fee set up by the district in your state, or they can bill you hourly. Your payment to your attorney can be worked into your Chapter 13 repayment plan.


Filing for bankruptcy is a big decision, and in the end you’re the only one who will know what’s right for you.

Bankruptcy can be not only a long process, but also a very emotional one for those seeking to discharge debts.

Do your research, evaluate all of your options, and then make the decision that most helps you reach your personal goals.

Looking into your options sooner rather than later may help you shore up your financial future and lose less in the long term.

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What Happens to Debt After Death?

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managing debt at old age

Credit card debt is at an all-time high in the U.S. According to a 2018 study on credit cards by MagnifyMoney, the average American with a credit card has a balance of $6,348. And overall, Americans are carrying $687 billion in credit card debt from one month to the next.

With numbers like those, it’s likely that many people will die with at least some debt in their name. If you have credit cards, a mortgage, student loans, personal loans, medical bills and auto loans, will they just go away when you die? Or will your family be held responsible? That all depends.

What happens to your debt after death?

Untangling exactly what happens to debt after death is a little tricky. It depends on a number of factors, including:

  • The type of debt
  • Whether someone else is a co-signer or has joint ownership of the property securing the debt
  • Whether the deceased lives in a community property state
  • The laws of the state in which the person lived when they died

Despite the potential variations, according to Kristin N.G. Dzialo, an attorney and partner at the estate planning law firm Eckert Byrne LLC in Cambridge, Mass., some general concepts apply across the board.

“Debt is specific to the person and doesn’t die with them,” Dzialo said. “If someone co-signed the loan or was jointly or severally liable for the debt, then that other person may be 100% responsible for the debt when the other person passes away.”

Jointly and severally is a legal term that means two or more people are fully responsible for the debt. For example, if two people are jointly and severally liable for a mortgage and one dies, the other person becomes fully responsible for the mortgage debt; their liability isn’t limited to their half of the mortgage.

However, Dzialo noted, “if the debt is just in the decedent’s name alone, then no one else is technically responsible for the payment of that debt.”

But that doesn’t mean the debt just goes away — instead, it becomes the responsibility of the deceased person’s estate.

“If there are assets in the decedent’s estate to satisfy the debt then it should be paid,” said Dzialo. “However, whoever is handling the estate (a Personal Representative, Executor or Trustee) must verify that the debt was a legitimate debt of the decedent.”

What happens to credit cards, personal loans and medical bills?

Credit cards, personal loans, medical bills and utilities are unsecured debts — this means they’re not backed by an underlying asset. In most cases, if the estate does not have enough money to pay these debts, the creditor is out of luck. However, there are a few exceptions.

Someone else can be responsible for repaying these debts if:

  • They co-signed the loan application
  • They are the deceased person’s spouse in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin)
  • They are the deceased person’s spouse, and state law requires the spouse to pay certain kinds of debts, such as medical bills
  • They were legally responsible for resolving the estate and didn’t comply with the state’s probate laws

“In community property states, this is where it gets dicey,” said Beverly Harzog, a consumer finance analyst and credit card expert at U.S. News and World Report. Different states play by different rules, so it depends on the state and specific wording of the law. In community property states, it’s a good idea to talk to an attorney to make sure everything is handled properly.

What about mortgages, auto loans and student loan debt?

Mortgages and auto loans are of secured debts, meaning they are backed by collateral. Student loans are typically unsecured, but how they’re handled at death is a little different than other forms of unsecured debt.


When someone passes away with an outstanding mortgage, if there are no co-owners who are jointly and severally liable for the mortgage, no co-signers and the property is not located in a community property state, responsibility for paying off the mortgage won’t fall to anyone else. If nobody pays the mortgage, the bank will foreclose on the home.

However, a home is often one of the largest assets in an estate. If the home is worth more than the mortgage balance, the heirs of the deceased may want to work with the lender to resolve estate issues and avoid foreclosure.

Auto loans

Like a mortgage, an auto loan is secured by the vehicle itself. If there is no co-signer and the estate does not have enough money to pay off the auto loan and heirs do not want the vehicle, the lender can repossess the car to satisfy the debt. If heirs wish to keep the vehicle, they will need to pay off the loan balance.

Student loan debt

How student loan debt is handled at death depends on whether it’s a federal or private student loan.

Federal student loans are discharged once the loan servicer receives acceptable proof of death, such as an original death certificate, a certified copy of the death certificate, or a photocopy of one of those documents. This also applies to federal Parent PLUS loans if the parent or student on whose behalf the parent obtained the loan dies.

With private student loans, it’s a little trickier. Many issuers of private student loans will discharge the debt if the student dies; others won’t. If there is a co-signer on the loan, the co-signer may be responsible for the full balance.

The Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155), signed into law on May 24, 2018, provided some protections to student borrowers and co-signers. The law prohibits lenders from demanding the loan be paid in full when a co-signer dies and requires that a co-signer be released from their obligation within a reasonable timeframe after receiving notice of the borrower’s death. However, these rules take effect for new private student loans after Nov. 18, 2018, and do not apply retroactively, according to the National Association of Federally-Insured Credit Unions. So co-signers may still be on the hook for private student loans taken out before that date.

4 cases when someone might have to repay your debt

As we mentioned above, there are some cases in which someone else may have to repay your debt. Let’s look at those in more detail.

1. When you have a cosigner

If anyone has co-signed for a loan, they can be held responsible for the remaining debt when you die. This can include:

  • Private student loans taken out before Nov. 18, 2018
  • Auto loans
  • Mortgages
  • Credit cards
  • Personal loans
  • Line of credit

Note that the responsibility for repayment doesn’t apply to authorized users on a credit card. However, when the account owner dies, an authorized user must stop using the card. If they continue making new purchases after the account owner dies, they can become responsible for the entire balance, not just the amount charged after death.

2. When you live in a community property state

If you’re married and you live in a community property state, your spouse may be responsible for paying off the debt with community assets, like savings accounts, investments and physical assets.

Whether you live in one of the nine community property states or not, it’s a good idea to talk to an attorney if you are worried about leaving your spouse with debts they can’t afford to repay. “Some states aren’t community property states but act like it in certain areas,” said Harzog.

3. State law requires the family members to pay certain kinds of debt

Paying medical bills is typically the responsibility of the deceased person’s estate if the estate has enough assets to cover the debt, but some states have laws that make spouses or adult children responsible for paying their parent’s medical bills if the parent can’t pay and doesn’t qualify for Medicare.

However, these laws aren’t always enforced, and they may take the family member’s ability to pay into account. Again, if you’re concerned about burdening your family with medical debt after you die, talk to an attorney familiar with the laws in your state.

4. When the legally responsible person doesn’t comply with state probate laws

When a family member passes away, responsibility for preserving assets, paying debts and distributing the remaining assets to the heirs falls to a Personal Representative. That Personal Representative may be an executor named in the will or an administrator appointed by the court.

If the Personal Representative doesn’t comply with state law, they may become personally responsible for the estate’s unpaid debts. Examples include failing to pay estate taxes, making bad investments or giving assets away before creditors are paid.

3 ways to prep your finances in case of death

If you are worried about leaving a tangled net of debts to your family members when you die, there are steps you can take to ensure your finances are neatly tied up.

1. Have a will

“It’s important to have a will and have your affairs in order,” said Harzog. “Do this while you’re young. You’ll update throughout your life as things change, you get married and have kids, but stay on top of this.”

2. Minimize the debt you carry

Of course, the best way to ensure you aren’t leaving debts for your heirs to deal with is to stay out of debt in the first place.

“Pay your credit cards in full and on time,” said Harzog. “It’s hard enough on survivors without leaving debt behind.”

3. Organize your finances

If you died today, would anyone know what assets and debts you have? Where you bank or how to access your accounts and safety deposit box? Whether you have life insurance? Too often, family members have to spend hours sorting through paperwork trying to figure these things out.

For that reason, many experts recommend maintaining a financial information binder. This binder might include:

  • Account numbers and contact information for bank, brokerage and retirement accounts
  • Copies of your will, power of attorney or other legal and estate planning documents
  • Contact information for family members
  • Copies of loan statements, tax returns and other financial information
  • Copies of policies for auto, homeowners/renters, health, life, disability and long-term care insurance
  • An inventory of physical assets including jewelry, artwork, antiques and other valuables
  • Copies of birth certificates and other personal records
  • Copies of real estate deeds and titles to vehicles or boats
  • Statements for other retirement assets, such as pension benefits statements

The binder can be kept in a safe deposit box or fireproof box at home. Just make sure someone knows how to locate it in the event of your death.

Debt after death: FAQs

Coping with the death of a loved one is difficult enough without the added pressure of collection calls from creditors. Here are more questions and answers about what happens to debt after someone dies.

Your family may get calls from debt collectors after your death, even if your family has no obligation to pay off the debts you’ve accumulated.

“If the family member is not in a community property state and not a co-signer, they should let the debt collector know the person is deceased and they’re not liable,” Harzog noted. “If they keep calling you, get an attorney. Some people will pay just to make them go away, but you shouldn’t have to do that if you’re not responsible.”

When someone dies, creditors have a certain period of time to make a claim against the estate. That period of time varies from state to state.

In most states, the executor must post a notice to creditors in the newspaper shortly. The executor may also be required to send written notice to any known creditors. After receiving the notice, the creditors have anywhere from a couple months to a couple years to make their claim.

Again, it’s a good idea to talk to an attorney in your state to see how the law applies where you live.

When you pass away, the Personal Representative of your estate is tasked with selling assets to pay off debts before distributing any remaining assets to heirs — but not all assets are up for grabs. Life insurance and money in retirement accounts, such as 401(k)s and IRAs, with named beneficiaries can be transferred to beneficiaries without going through probate.

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How Much Does It Cost to File Bankruptcy?

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bankruptcy guide

There are few mandatory costs of filing for bankruptcy, but they add up. The major expenses you’ll have to budget for are court, attorney and counseling fees.The fees you pay will depend on a host of factors, including where you live, the assets you own and whether you choose to file Chapter 7 or Chapter 13 bankruptcy.

How much does it cost to file bankruptcy?

In Chapter 7 bankruptcy, a trustee sells off nonexempt assets (such as a second home, cars you don’t use for work, etc.) to settle your debts. After this, your remaining unpaid debts are discharged. Chapter 13 organizes your debts into a three- to five-year plan to repay some or all of your debts, and it generally lets you keep assets you could lose in a Chapter 7 filing. Both types of bankruptcy result in most, if not all, of your remaining debts being discharged. You can learn more about the detailed differences here.

Now, to the costs. The fees mentioned in this piece are accurate as the date of publishing.

Court fees

The court fees for Chapter 7 total $335, while filing for Chapter 13 costs $310. The total amount you pay consists of a filing fee, administrative fees and, if you file Chapter 7, a trustee fee. The filing fees are the same nationwide.

 Chapter 7Chapter 13

Filing fee



Administrative fee



Trustee fee



Total cost




Attorney fee

Beyond court fees, you’ll need to pay an attorney, which will make up the bulk of your bankruptcy expenses. The amount you will pay can vary greatly, from hundreds to thousands of dollars. The attorney’s bill will depend on factors such as your local laws, what type of bankruptcy you file and the attorney’s rates.

Local laws

Where you file for bankruptcy in the country may determine your starting point when budgeting for an attorney. For Chapter 13 filings, the court in each jurisdiction generally sets flat-rate attorneys fees referred to as “no-look” fees.

The fee is “presumed to be reasonable no matter what’s involved in the filing,” said Bob Drummond, the Chapter 13 trustee for the district of Montana. Drummond said more than half of U.S. districts have set no-look-fee thresholds, and the fee varies by district. You can check with your district court to find out if they have a no-look threshold.

The court must approve attorney fees in Chapter 13 filings unless they fall below the no-look amount or the district hasn’t set a no-look threshold. If an attorney charges a rate below the district’s no-look threshold, they don’t have to get the court’s approval. But if they want to charge above the threshold — for example, if they want to charge more for a complex case that will take a lot of their time — the attorney must submit a fee application.

Type of filing

The attorney fee will also vary by type of bankruptcy filing. “There is going to be regional variation, but I think it’s fair to say Chapter 7 is inherently cheaper than Chapter 13,” said John Colwell, president of the National Association of Consumer Bankruptcy Attorneys.

“Chapter 7 is quicker, cleaner [and] faster and therefore … less expensive, generally speaking. With Chapter 13, not only is the debtor in there for three years, four years, five years, but so is the lawyer,” Colwell said. Besides time spent, Colwell said the increased responsibility and liability a lawyer takes on in a Chapter 13 filing compared to a Chapter 7 filing contributes to the higher bill.


As far as an attorney’s experience factors into cost, Colwell recommends you don’t cut corners to save money.

“When you are shopping for a bankruptcy attorney, you want to look for the best you can afford,” Colwell said.

Colwell recommended shopping around and vetting an attorney before you decide on one. Ask about their track record in bankruptcy cases and why they lost cases — if they have lost any. Colwell advised you also check with organizations such as the Better Business Bureau to see the business’ rating and reviews. If you consider a lawyer based on a referral, ask the person who referred you any questions you might have.

When the attorney is paid

Attorneys involved in a Chapter 7 bankruptcy usually require upfront payment. If their pay becomes a debt due after the bankruptcy filing, it may be discharged and they might not get paid.

With Chapter 13 filings, the attorney may require you to pay some of their fee upfront, and they will generally allow you to pay the remaining amount through your monthly payments in the court-approved repayment plan.

Counseling fees

Regardless of what type of bankruptcy you elect, you must complete two rounds of counseling as part of the process.

You must complete pre-bankruptcy credit counseling within the 180 days before filing for bankruptcy, and it ranges from $10 to $50, depending on where you live.

The court also requires you to complete a post-bankruptcy debtor education course after the petition to discharge your debts. The post-bankruptcy debtor education course fee will likely cost between $50 and $100, depending on where you live.

If you are unable to afford the counseling fee, you can ask the counseling organization for a fee waiver before starting the session. You must complete the counseling with an organization approved by the U.S. Trustee program. You can find a list of approved credit counselors here and a list of approved debtor education counselors here.

Other associated costs

Aside from the standard fees mentioned above, other expenses may increase the cost of bankruptcy. Here are some extra costs that Colwell and Drummond said you might encounter:

  • Credit report: Your attorney may charge a fee (about $30 to $60) to pull your complete credit report.
  • Tax transcript: Your attorney may charge a fee ($10 to $20) to pull your tax transcript from the IRS.
  • Credit repair: Some law firms offer post-bankruptcy credit repair services (the fees vary).
  • Conversion fee: If your case is converted from Chapter 13 to Chapter 7, you must pay a $25 fee.
  • Adversary proceedings: An adversary proceeding is a case within bankruptcy court. An adversary proceeding may occur for various reasons, including anytime a creditor, spouse or other affected party challenges your bankruptcy case and requests to be exempted from the discharge. Generally, your lawyer must appear in court to defend you in an adversary proceeding and will bill you for it.
  • Showing up in court: If you have to show up in court and your lawyer has to be there with you, they will likely charge you an additional attorney fee. For example, in a Chapter 13 filing it may take more than one attempt to get your repayment plan confirmed by the court. Each time you try, your lawyer will need to be present.

Reducing the cost of filing for bankruptcy

Filing for bankruptcy can be expensive. On the bright side, there are a few things you can do to help reduce your cost of filing.

Court fee waivers

Those who may not be able to afford the full $335 associated with filing a Chapter 7 bankruptcy may qualify for a fee waiver. You must fill out an application to waive the Chapter 7 fee.

Waivers are generally not available for Chapter 13 cases, Drummond told MagnifyMoney.

“The reason we don’t see [waivers] as much in a Chapter 13 case is because you have to have income and the ability to make a plan payment,” Drummond said. “If they can do that, they probably have enough income to pay the filing fee, too.” Chapter 13 court fees can generally be paid in installments, described below.

Paying court fees in installments

In either a Chapter 7 or Chapter 13 filing, the debtor can file an application with the petition asking to pay the filing fee in installments. The debtor must propose an installment schedule, and the fee may be paid in up to four installments. When you submit the application, the budget included in your bankruptcy petition must justify your need to pay the court fees in installments.

Pro bono

If you don’t have the funds for a bankruptcy attorney, you may consider looking into pro bono services. There may be an organization in your state that offers pro bono legal services. The Montana Legal Services Association, the Consumer Bankruptcy Assistance Project’s Fresh Start Clinic in Philadelphia and the New York City Bankruptcy Assistance Project all offer pro bono help for Chapter 7 filings for eligible clients.

You can find a list of pro bono resources, compiled by the American College of Bankruptcy Foundation, here. You can also search for organizations that provide pro bono legal services on Pro Bono Net.

DIY (pro se)

You could also forgo an attorney and attempt to complete a bankruptcy filing on your own, but the experts told MagnifyMoney they wouldn’t recommend it.

“Sure you can file pro se. Do I advise that you do it? Hell no. Double hell no,” Colwell said. “The paperwork is extremely complex, and there are even attorneys that don’t file bankruptcy because they think they might screw something up.”

Drummond told MagnifyMoney that pro se cases are more likely to get dismissed or run into issues with assets, resulting in the debtor losing assets they wouldn’t have had they consulted with an attorney.

“In the long run, they may end up saving more money if they hired counsel than if they didn’t,” Drummond said.

Judgment proof

If you are elderly, disabled or a retiree, you may not need to file for bankruptcy at all, as you may be considered “judgment proof” or “collection proof.” That means even if your creditors tried to collect and sued you, they wouldn’t be able to collect because your retirement, Social Security or disability income may be exempt from collection. If you have a large asset such as a home, however, the creditor could place a lien on the property, which may pop up if you decide to sell the asset. Consult with an attorney to verify if you are judgment proof.

The bottom line

It will more than likely cost you hundreds to thousands of dollars to complete a bankruptcy filing, but the benefit of getting your debts discharged may make the cost worth it. The court and counseling fees are mandatory and fixed, for the most part, but you may have some flexibility when it comes to the bulk of your cost: budgeting for an attorney. It’s always worth it to do your due diligence — shop around, compare rates and see if you qualify for pro bono options before choosing counsel.

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Is Debt Consolidation a Good or Bad Idea? Here’s What to Consider

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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debt consolidation

Even though most people try to stay out of debt, sometimes it’s hard to avoid. Over time, you might start to accumulate a number of different loans that served different purposes. This is commonly seen with student loans. In order to afford an education, students may take out debt each year to pay for tuition and other costs.

However, this problem isn’t exclusive to those who owe student loans: in fact, many people run into the frustrating dilemma of having multiple consumer loans in repayment.

To clean up their repayment process — and to possibly get a better interest rate or repayment term — some people turn to debt consolidation. But is debt consolidation a good idea? And if so, when is it right for you?

What is debt consolidation?

Debt consolidation is a process that rolls all of your existing debt into one, convenient loan. This means you could go from having multiple loan payments from different lenders with different repayment terms, to having one payment each month with a single lender.

The debt consolidation loan (often a personal loan) is used to pay off all of your other loans. This can be viewed much like a balance transfer — you’re transferring the balance of all of your loans to one bigger loan.

The lender providing your loan typically provides you with a lump sum payment to repay all of your debt, or it works directly with your other lenders to pay off your loans for you as part of the consolidation process.

You can consolidate a wide range of debt types, including:

Debt consolidation can only really work if you can secure a personal loan with an interest rate that is lower than what you are currently paying on your debts. That way, you’ll save money on interest over time after consolidating.

Finding a lender can be difficult. You may consider local banks and credit unions. But online lenders may have better rates and terms. To help you shop lenders, consider LendingTree’s personal loan tool. Using the tool, you’ll enter some personal information plus what you’re looking for in a loan. Afterward, you’ll receive loan offers, which you can compare to find the best deal for your credit score.



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LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

When is debt consolidation a good idea?

Debt consolidation isn’t for everyone, but there are several scenarios where this course of action would make sense for your unique financial situation.

You have a high credit score that could secure you a lower interest rate.

If you’re considering debt consolidation, you’re looking to get a better deal on your new, consolidated loan than what you already have. If you’re paying high-interest debt (such as credit cards or payday loans), consolidating at a lower interest rate could save you money on interest. (Find out how to view your credit score here.)

You have an isolated reason for getting behind on your debt.

Sometimes life happens, and we end up with debts that are unavoidable in the moment. A medical emergency that your savings couldn’t totally cover is an excellent example of this type of unavoidable debt. If you’re working to put a plan in place to stay out of debt in the future and are looking to simplify your debt repayment, consolidation may be for you.

Your consolidated loan offers additional benefits.

This might mean a shorter repayment term or fewer fees to ensure you’re making the most out of a new loan.

You’re exhausted by tracking all of your different loans.

If you have a number of different loans and are running the risk of missing a payment or overpaying due to high interest, it might make sense to consolidate them all to simplify your financial life and help you pay down your debt more quickly.

When is debt consolidation a bad idea?

Although debt consolidation can be a huge help in many cases, there are certain situations where it doesn’t make sense to consolidate your debt.

You have a spending problem.

Debt consolidation shouldn’t be used as a method to free up more cash flow to continue spending. If you find that your debt is largely consumer debt, and that you have no intention of reevaluating your budget or your lifestyle to support your debt repayment journey, consolidation isn’t going to make things better — it’s just going to act as a short term fix to your lifestyle problem.

You’re digging yourself a deeper hole.

Although it’s commonly the case that a debt consolidation loan will come with better interest rates and repayment terms, this isn’t always true. If consolidating your debt is going to force you to repay your loans at a higher interest rate, you’re better off keeping your multiple loans (even if it’s frustrating to juggle them all simultaneously).

You have an average or below-average credit score.

The interest rate you’re able to secure is largely dependent on your credit score. If your score is less than stellar, you’ll have to pay close attention to what interest rate you’re offered, and whether it’s actually a better solution than simply staying the course and paying down your multiple debts.

You’re stuck with new fees.

Sometimes, debt consolidation services have an origination fee of between 1% to 8%. If your ultimate goal is to save money through debt consolidation, this may not work for you.

Don’t just assume that debt consolidation is the answer you’ve been looking for — do your research first. You might find that sticking with your numerous debts and paying them down at their reasonable interest rates makes the most sense until you’re able to get your spending habits in check, or until you’re able to raise your credit score by consistently paying them down.

What are the risks of debt consolidation?

There are several risks and downsides to debt consolidation that you need to be aware of:

It might damage your credit score.

When you first consolidate your debt, you may see a minor dip in your credit score: this is because the lender you’re applying with will do a hard credit inquiry after you fill out your application. If you apply with multiple lenders, multiple hard credit inquiries will push your credit score down. However, you can avoid this problem by getting pre-qualified with multiple lenders, and only filling out an official application with one of them to reduce the number of hard credit inquiries on your credit report.

You may be unable to continue to use lines of credit you previously had available.

By using a debt consolidation service, like a personal loan, your total credit utilization doesn’t go down. So, even though your credit card is magically paid off by your new consolidated loan, that doesn’t mean you get to start racking up more debt. Doing so will cause your credit score to go down, and you may end up in an even stickier situation than you were in before.

You may pay more interest over time.

You’ve likely been paying back your existing debts at a high interest rate for a given length of time. Sometimes, people pay back multiple debts for years before they consider consolidation. Then, when you apply for consolidation, they might extend your repayment term even further — meaning you’re technically paying “extra” interest for the convenience of consolidation. However, you can fix this problem by working to pay your debt back before your repayment period is up and, in turn, driving down your principal (and the total interest you have to pay).

You may have fees.

Some debt consolidation loans have origination fees to process your new loan. Watch these fees closely to make sure they’re not unreasonably high — if they are, consider looking into another debt consolidation method.

You may get a shortened timeline for repayment.

Debt consolidation isn’t usually intended to be a long-term solution. Instead, debt consolidators shorten your repayment timeline. This can be incredibly helpful if you’re looking to get out of debt quickly, but it also may mean higher monthly payments and an increased likelihood that you’ll default on your loan.

3 alternatives to debt consolidation

If you’ve looked into debt consolidation, and have determined it isn’t the right choice for you, you have several alternatives to consider.

  1. Home equity line of credit (HELOC). A HELOC is where you borrow money against the equity you’ve built up in your home. However, if you’re worried about being unable to repay the loan, you may want to select a different alternative option as your home is technically collateral if you’re unable to pay your HELOC. (Learn more about using home equity to consolidate debt here!)
  1. Balance transfer. A credit card balance transfer is often a great option for people looking to consolidate their credit card debt. Many credit card companies offer 0% interest for a set period of time, which means you could potentially knock down a notable portion of your debt principal before having to pay interest each month. Be sure to read the terms and conditions regarding any fees or deferred interest clauses. (Check out our pick for the best balance transfer credit cards.)
  2. Debt refinancing. If you’re more concerned about getting a lower interest rate on your loans but aren’t worried about managing multiple payments, refinancing might be an option to consider. Through refinancing, you’ll be able to apply for a lower interest rate through your existing lenders, based on your previous repayment history.

Make sure you look at all of your options when trying to consolidate your debt — you never know what you might find, or what’s going to work best for your long-term financial goals. If you do choose to pursue debt consolidation, make sure to shop around with different lenders. Being able to compare different interest rates, fees, and repayment terms, can help you ensure that you’re getting the best loan as you start to move toward debt free living.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Dave Grant
Dave Grant |

Dave Grant is a writer at MagnifyMoney. You can email Dave at


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Pay Down My Debt

Can You Be Arrested for Debt?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Disclosure : By clicking “See Offers” you’ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.

dealing with debt

You’re in significant debt. The collection calls have started coming in, and letters seem to appear in your mailbox every day. Your debt is mounting, and the constant phone calls and letters are starting to make you nervous.

Can I be arrested for my debt? If this question has entered your mind more than once, take a deep breath and relax. Aside from a handful of extenuating circumstances (which we’ll cover below), you cannot be arrested for your debt.

Read on for everything you need to know about whether you can be arrested for debt and what you should do if a lender threatens to arrest you.

Can you be arrested for debt?

In short, the answer is no. You cannot be arrested for the debt you hold, whether it’s credit card debt, a personal loan, a medical bill, student loans, utility bills, a car loan or any other form of debt that is referred to as civil debt. You can be sued for your debt, but you cannot be arrested. It is illegal for lenders and debt collectors to threaten to arrest you for not paying back your debt.

“Debt collectors can’t threaten to arrest someone,” said Barry Coleman, vice president of counseling and education programs for the National Foundation for Credit Counseling. “They can’t make threats to intimidate people.”

There are a handful of situations, Coleman said, in which threatening to arrest someone can be a legal option. This would apply in rare cases in which the arrest would be related to something tangential to the debt — such as fraudulent activity, identity theft or defying a court order — but not the debt itself.

“We always say: If someone gets an order to appear in court, even if they know they legally owe that debt and they can’t pay it right then and there, show up in court,” Coleman said. “Because if you don’t, then you will face other consequences.”

Also, consumers can be arrested if they cheat on their taxes or don’t pay child support debt, according to Coleman. “Those types of debt are a little bit different,” he said.

What should I do if a lender threatens to arrest me?

A lender threatening to arrest a debtor violates the Federal Trade Commission’s Fair Debt Collection Practices Act (FDCPA), according to John Ulzheimer, founder of The Ulzheimer Group and a credit reporting expert who worked for FICO and Equifax.

“You’re not allowed to use abusive tactics to collect debt,” Ulzheimer said. “And certainly indicating or suggesting to somebody that they can go to jail if they don’t pay [their debts] is illegal.”

If a lender threatens to arrest you, there are a few things you can do. You can do nothing and hope the threats stop, Ulzheimer said. (It is wise to document the threats of arrest, however, in case you need to take future legal action against the lender or debt collector.)

You can also leverage your rights under the FDCPA and file a lawsuit against the debt collector for abusive debt collection practices.

Coleman adds that you can report the lender to the Consumer Financial Protection Bureau (CFPB), and someone with the bureau will follow up with you about the complaint.

“Both the [CFPB] and the Federal Trade Commission have authority to pursue action if a debt collector is threatening something that they can’t legally do,” Coleman said.

What can happen if I don’t pay back what I owe?

Consequences for not paying back debt vary by state, but there are some federal regulations on unpaid debt.

Although you cannot be arrested for your debt, there are a handful of other things that can happen. “There are a lot of bad things that can happen when you don’t pay your debt,” Ulzheimer said. “Nothing good comes from not paying your obligations, right?”

If you don’t pay back your debt, it will go into default. Once in default, creditors will typically try to collect the debt themselves, Ulzheimer said. Your credit report and score will be negatively affected, and you will likely receive phone calls and letters.

If you still don’t pay back your debt, the lender will likely sell your debt to a third-party collection agency or debt collector. “They will eventually get sick and tired of attempting to collect the debt and they will either sell the debt or consign the debt to a debt collector,” Ulzheimer said. “If the debt is large enough or if the debt collector chooses to, they can file a lawsuit against you.”

If a debt collector files a lawsuit against you, you should show up to court no matter what. If you don’t show up, the collector can get a default judgment against you.

Coleman said one potential repercussion of not paying back one’s debt is court-ordered wage garnishment. That means the debt collector can legally seize a portion of your paycheck before the money hits your bank account.

“Wage garnishment, I think, is probably the biggest repercussion of not paying a debt,” he said. “It is probably the biggest concern for folks that are behind on the debt and aren’t trying to work with that particular creditor or debt collector.”

How to fix your debts

If you’re struggling to pay back your debts, there are a handful of important steps you can take to get on solid financial footing.

1. Don’t ignore your lenders or debt collectors.

Even if you can’t afford to pay back your debts, one of the worst things you can do is avoid your lender or debt collector. Answer the lender or debt collector’s phone calls, and, of course, any court summons you receive.

“Consumers will want to be proactive and work with their creditors and any debt collectors when they owe debt to work out some sort of an arrangement to avoid it escalating and becoming an even bigger situation,” Coleman said.

2. Negotiate with your lenders.

Some consumers might not be aware of this, but you can negotiate your debts with your lenders. Contact your lender and explain your financial situation. Tell it that although you cannot repay the entire debt, you can pay X amount each month. If you have extenuating circumstances, such as the loss of a job, illness or a death in the family, tell the lender.

“If you don’t have the means to pay, just be honest and state that,” Coleman said. “If you can pay a little bit, offer to do that. If the lender says, ‘OK, I’ll accept this payment arrangement,’ just ask that it be in writing so that you have something to back that up.”

3. Seek help from a nonprofit credit counseling agency.

If you’re struggling to repay a significant amount of debt across multiple channels, consider contacting a nonprofit credit counseling agency. Counselors at these agencies can help you come up with a plan for repaying your debt and can negotiate with lenders on your behalf if necessary.

4. Consider using the debt snowball or debt avalanche method for repaying debt.

These are two common strategies consumers use to repay their debt. The debt snowball method involves paying back debts from smallest to largest, while the debt avalanche method involves paying back higher-interest debts first.

5. Consolidate your debt.

If you have multiple debts and are struggling to stay organized, consider taking out a debt consolidation loan (nonprofit credit counselors can help in this area). This involves consolidating all your debts and making one monthly payment that gets distributed among your various creditors. If you have a fair credit score, you may even be able to snag lower interest rates, which could save you money in the long term.



Credit Req.

Minimum 500 FICO

Minimum Credit Score


24 to 60


Origination Fee



on LendingTree’s secure website

LendingTree is our parent company

LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

Although you cannot be arrested for debt, there are myriad consequences that can result from not paying back what you owe. Ignoring your debts or any court-ordered summons will only make your situation worse. Be as proactive as possible to avoid the repercussions of not repaying your debt.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Friedlander
Jamie Friedlander |

Jamie Friedlander is a writer at MagnifyMoney. You can email Jamie here


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