Alternatives to Bankruptcy -- DIY Get Out of Debt Free Card

Back in the mid 1980s when I was still cutting my teeth in the accounting industry, an old farmer entered my office that went bankrupt a few years prior. After the bankruptcy proceedings were completed he started paying everyone he owed anyway. “It is my moral duty,” he told me. “I just needed extra time to get it done.”

My new client was under no obligation to make these payments. As he paid off each creditor, he requested a certificate or letter acknowledging his full payment. He proudly displayed these letters.

As I prepared to write this hub, I could not shake the recurring memory of this event. What kind of man stands up to his responsibility like that when he is no longer obligated to pay by the rules of society? The more important question is: Why did he file for bankruptcy if he was going to pay everyone back?

The answer is a template for others in debt to follow. His debt was so large he could not pay it before some creditors forced him into bankruptcy. Still, he worked hard to return all he borrowed. Farming was tough back then. Perhaps it is always tough. I have never met a more honorable man than this farmer. I am proud to call him “grandfather.” Today he is financially sound and 90 years old. He plays cards at my home each Friday evening with the family and a few neighbors. I insist the game takes place at my home. I want my children to learn from a good example.

Real Alternatives

Debt can quickly overwhelm the steadiest of minds. The constant barrage of bills can consume so much time that there is little time left to earn money to pay the bills. Bankruptcy is an alternative, but avoiding bankruptcy all together is preferable to many.

My grandfather felt obligated to pay his bills. It is easier today to work out a settlement with lenders. The options available to you depend on the level and type of debt. Certain debt cannot be discharged in bankruptcy. Child support, lawsuits, and student loans fall into this group. Tax debt can be discharged in bankruptcy if the IRS has at least three years to swing at you.

Lending institutions and vendors are frequently willing to work out arrangements. Even if they no longer wish to do business with you, they do want the money owed them. An open dialog allows the vendor to plan.So how did my grandfather manage to pay everyone back? First he stopped digging the hole and then he started making payments every opportunity he could. But he was lucky. He was young enough and healthy enough to get the job done. The number one reason for bankruptcy in the United States is medical debt. You may not be healthy enough to make payments. Still, there are alternatives. If all else fails, bankruptcy is still there.

Medical Debt

I want to start with medical debt because it is the leading cause of bankruptcy in the U.S. And for every medical bankruptcy there are scores more that suffer under the weight of medical bills.

No matter how frugal or conservative you are, medical debt can find and bite you. It is unlike credit card debt that is self-inflicted and is possible to stop. The bills keep coming if you have cancer or other serious disease or complication.

If medical bills are only a problem and not a mountain of bills, it is possible to reduce the amount owed. For many folks, medical bills are only an inconvenience. Ask for a discount for paying at the time of service. It is common to receive 30% and more off a medical bill when paid in advance. For bills already in place, call the accounting department and work out a deal. I had another client in the late 1990s where her husband died of cancer. She settled the bills for almost 80% off. She worked each vendor hard. She avoided bankruptcy and cleaned up the financial mess. For the medical offices, it was a better solution to bankruptcy where they would have spent money on legal fees and received the same or less.

My office desk has a glass top. There is a poster of a frog half down a stork’s throat. The frog’s arms are out and choking the stork’s neck. The caption reads: Never Give Up. That is the way debt resolution works. Keep a constant dialog with creditors. Make an honest effort. Most vendors will accept something, anything, rather than nothing. It certainly beats the cost and time of fighting a bankruptcy.

It is also possible to file a medical bankruptcy only. Consult an attorney on the rules in your state.

Credit Card and Other Personal Debt

Credit card and other personal debts are usually self-inflicted. The first step with these debts is to stop digging the hole. There is plenty of literature in the library and internet on how to cut spending, pay down debt, and live within your means. Might I suggest Dave Ramsey?

Unlike medical debt, you can stop adding to the pile. Personal debt also has a statuette of limitation. Each state has their own statuette of limitation for each kind of debt. When the statuette of limitation expires, you are no longer legally obligated to pay the debt. With the exception of a few states, like Wisconsin, a creditor can still hound you for payment. Expiration of the statuette of limitation only removes the legal remedy for the creditor.

Every time you make a payment, the statuette of limitation starts over. In most states, payments made on out of stat debt starts the clock all over again and the creditor will then have legal remedies available again. If your debt is current or nearly so, waiting for the statuette of limitation to run out will be a painful process.

Many credit card companies will reduce your balance for a payment plan. If credit card debt is forgiven, the IRS considers this cancellation of debt and it is income reportable on your tax return. Work with a qualified tax accountant to understand this issue as it pertains to your personal situation. Be prepared.

Work out a payment plan with all vendors, if possible. The goal is to stop the wasted time and stress. By having all creditors on board, you can focus on earning the money to get the bills paid.

Statuette of Limitation for Selected Debts

State 
Oral 
Written 
Promissory
Open-ended Accounts
AL 
6
3
AR 
5
3
AK 
3
3
AZ
6
3
CA
4
4
CO
6
3
CT
6
3
DE
3
4
DC
3
3
FL
5
4
GA
6
6
HI
6
6
IA
10 
5
5
ID
5
4
IL
10 
10
5
IN
10 
10
6
KS
5
3
KY
15 
15
5
LA
10 
10 
10
3
ME
6
6
MD
6
3
MA
6
6
MI
6
6
MN
6
6
6
6
MO
5
10
10
5
MS
3
3
3
3
MT
5
8
8
8
NC
ND
NE
NH
NJ
NM
NV
NY
OH
15 
15 
OK
OR
PA
RI
10 
SC
SD
TN
TX
4
4
4
4
UT
VA
VT
WA
WI
10 
WV
10 
WY
10 
10 
Source: Credit Equity Fund II LP Open-ended accounts include credit cards.

Tax Debts

Tax debts are a hybrid. You can have tax debts discharged in bankruptcy, but need to file the tax return and allow at least three years to pass. Your state might have a slightly different rule so consult an attorney.

Federal income and payroll taxes have a statuette of limitation; states do not. The IRS has 10 years to collect or they are precluded from doing so. The statuette clock does not start until you file or the due date, whichever is later. Certain events temporarily stop the clock. If you file for an Offer in Compromise or a Due Process Hearing or are out of the country for an extended period of time, the statuette of limitation clock stops ticking. After these events pass, the clock starts ticking forward again from where it left off. You can request a transcript from the IRS that shows the date the statuette of limitation expires.

Be aware that the IRS will get aggressive as the 10 year period winds down. They will garnish, levy, and lien with reckless abandon. After the statuette of limitation expires, all garnishments, levies, and liens are no longer valid. Sometime it pays to wait out the IRS.

State taxes are a different issue. There is no statuette of limitation on state taxes. The state will never stop pursuing taxes owed them. Each state is different, but by in large, most states are significantly more difficult to work with than federal. State taxes might be the albatross that sinks you into bankruptcy.Tax debts have a lot of potential solutions on the federal and state side. Installments agreements, Offers in Compromise, and abatement are available on the federal and state level. Stay away from the guys that advertise on TV. Most are scams. Use a local attorney or accountant. Question each professional for experience in the tax debt arena. You want a seasoned pro. Nearly all people with tax debt do not need to file bankruptcy due to all the other options available to manage tax liabilities.

Conclusions

It is impossible to cover every facet of debt and bankruptcy in a short hub. You can go it alone, but if your debt is overwhelming you will need professional help. Use local organizations. You want to sit down together and discuss your issues. Goodwill Industries has local debt management companies in their building many times. Don’t jump at the first promise of help. Shop around. Questions several accountants and attorneys if you intend on engaging their services.

Set up a plan. Get all your debt listed in one place. A spreadsheet is a good way to get everything down. This allows you to view your entire situation, how much you owe, monthly payments, and so forth. List your income and amount available to pay each debt. Now you are armed with information. Now you can offer each creditor a reasonable payment plan you can keep.

The road will be long and hard. Any other answer lacks honesty. You must commit to a plan. You must set your mind on a mission, a mission to destroy debt in your life. Then, once accomplished, you are free.

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