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The Difference Between Bankruptcy and Foreclosure – December Interview

Katherine: Hello, everyone. We have attorney Peter Daigle talking with us today to help us talk about and understand bankruptcy. Peter, welcome back to This Needs to be Said. How are you?
Peter: I’ve very good. Thanks for asking.
Katherine: Listen, I want to jump right into our conversation. Someone submitted a question to me, and they wanted to know, “Is there a difference between bankruptcy and foreclosure or are they the same thing?”
Peter: The difference between bankruptcy and foreclosure? No, they are two separate things. What happens in a foreclosure is essentially the bank will claim its rights to your property. If you own a home, the bank is saying that you’ve breached your contract with us and you’ve not made your payments on time. Therefore, we’re going to take the collateral and the collateral is usually your home. It’s a legal process that the bank has to go through. You’ll have a chance to be heard just so if the bank’s math is wrong and you have made payments and they haven’t credited you for them, you’ll have an opportunity to respond. That’s a process that takes approximately three months for a foreclosure to occur. Assuming that you are behind and you don’t have any defenses, ultimately the bank will have an auction and they will sell off your property.
A bankruptcy is essentially stopping the foreclosure. It’s the opposite side of that coin where you actually would be able to save your home assuming you wanted to. You could use the rules of bankruptcy to save your house and stop the foreclosure. The actual filing of a bankruptcy will stop the foreclosure dead in its tracks. Then you’ll be given an opportunity to reorganize and to try to come up with a way that which you can then become current and a way to handle your arrears over time. It’s basically reorganizing your mortgage to avoid foreclosure.
Katherine: That really leads us to our next question that someone submitted to me. They wanted to know which type of bankruptcy do they file so that they can keep their things?
Peter: That’s a great question. There are two types of consumer bankruptcies. There’s Chapter 7 and Chapter 13. What we would be talking about here is what’s called a Chapter 13. It’s called a reorganization. In the business world it’s called a Chapter 11. If you were a major corporation and you needed to reorganize, you’d be filing a Chapter 11 but for a consumer it’s called Chapter 13. Where a Chapter 7 is a liquidation which means that you’re not looking to reorganize your home and you plan on letting it go. In the instance that you want to save your home, it would be Chapter 13.
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Katherine: A question I had, I’ve heard of consolidation. I don’t know if that’s what you’ve been talking about with bankruptcy or if it’s similar at all. I’ve heard of commercials on television talking about, “Consolidate your bills into one payment.” Is that similar to bankruptcy? Then my second part of that is, is consolidation the way I’ve heard it on television, is that even a good thing?
Peter: Consolidation is difficult. In fact, if you look at the first three letters of consolidation it’s con. That’s sort of what the attorney’s will look at that because what happens in a consolidation is that you’ve got to pay your debt back, all of it. The company that you’re trying to consolidate don’t have to participate in the program. The company that you go to through to do a consolidation would charge you the fees to try to consolidate but the creditors are not forced into doing the consolidation.
They can choose to opt out of the consolidation and sue you directly. It’s really a voluntary way to try to reorganize your debt but it doesn’t have the same teeth in it that a bankruptcy has. Where a bankruptcy has a defined set of rules and the creditors are forced in a reorganization to follow the rules of the court. In a debt consolidation it’s a little bit more of a free-for-all where it’s voluntary participation. Generally the fees that you would pay a debt consolidator are far greater than you’d pay an attorney to file reorganization.
Katherine: Why would a person choose to do that?
Peter: If the debt is small, if you called me up and you said I only owe five or six thousand dollars in debt then I would encourage you to seek at least an estimate on a consolidation. If it’s small enough then it may warrant you to pay it off, especially if you are a high earner. If you had a good income coming in and you didn’t have a lot of debt, then you could look into it. I would still encourage you to seek the advice of a bankruptcy attorney so you could compare the two. You could compare the debt consolidation with the bankruptcy and you can see which one would better suit you.
If you have a considerable amount of debt, more than say $15,000 or so, then you absolutely should talk to the bankruptcy attorney and you may find that that’s a better option.
Katherine: As we were talking about alternatives to bankruptcy, because I didn’t even realize that was going to tie in to this next questions. Outside of consolidating or trying to do it yourself of organization, are there other alternatives to bankruptcy?
Peter: You could do what’s called a debt settlement where you make offers to your credit card to settle the debt. The pros of that is you could avoid the bankruptcy. You could sometimes if you had the cash or ability to borrow the money you could settle the debts for less than what you owe. There are two problems with that. One is that it’s a negative. The effect on your credit is far worse than a bankruptcy because the creditors are going to report that you paid less than agreed and the amount that was settled was less than agreed.
The second thing is you’re not going to be able to do it while you’re currently paying because the banks aren’t going to believe that you don’t have the ability to pay. You’ve got to get far behind on your payments to the point where they realize that they may be better off taking the settlement than writing the debt off. The settlement offers are anywhere between 20% and say, 80% and that depends on what your income level is.
You may be required to submit a financial statement on that to show that you don’t have the ability to pay. If the bank believes you have the ability to pay, they may not take the settlement. That’s another option.
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Katherine: Out of all these we’ve talked about, bankruptcy, consolidation and … Give me the name of the last option we just talked about. You said debt … What did you call it?
Peter: Debt settlement.
Katherine: Debt settlement. Out of all three of those options it sounds like bankruptcy is the best option but it depends on certain things. One of the things you pointed out is if you have considerable amount of debt that you may not want to try to handle it on your own. If it’s a teeny, tiny bill and you can’t pay it off, so you’re asking yourself some questions on what would be the most beneficial for you. What I’ve heard in our conversation is that bankruptcy gives you the ability to reset and start fresh. It doesn’t sound like you said that with these other two options. Am I understanding correctly?
Peter: That’s correct, right. Basically you reset your credit meter back to zero with the bankruptcy and the other options not necessarily. You have one other option.
Katherine: What’s the other option?
Peter: To find a rich boyfriend.
Katherine: Oh, my! Okay, well I’ll start with the first three options, bankruptcy, debt settlement and consolidation; I will have to look with that last one. That’s like winning the lottery I think. You really sank my ship with that last one. Listen, Attorney Daigle, thank you so much for joining us again this month to talk with us about bankruptcy and what the alternatives are and allowing people to make their decision on what would be best for them. What I want to do before we’re finished here today is to let people know how to get in touch with you.
Peter: Fantastic. My phone number is 774-470-4446. My e-mail address is or you can go to my website, at: and you can access our information from there.
Katherine: Awesome. You also have a book. Please tell them about that.
Peter: Yes, I do. I wrote a book called “The Truth About Bankruptcy in Massachusetts”. It sort of tells all the rules and because they’re federal rules, they generally apply to bankruptcy in any state but it will give you a good overview about it. It’s a very short book and you can order the book online. There’s no charge for the book.
Katherine: Awesome! Thank you so much for being a part of This Needs to be Said and until next month, have a great day.
Peter: Okay, great. Talk to you soon. Thank you.
Katherine: Bye.
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