Frequently Asked Questions
Debt Settlement
Q: What is Debt Settlement?
A: Debt settlement is an agreement between a debtor and a creditor to pay off any remaining debt at a reduced amount. Settlement occurs when a creditor is satisfied that a debtor no longer has the financial ability to repay the debt owed in full. In agreeing to a debt settlement, the creditor is relieving the debtor from their full debt obligation. Debt settlement is typically the result of debt negotiations.
Q: Who qualifies for Debt Settlement?
A: Individuals that qualify for a debt settlement arrangement are those that are experiencing some kind of financial hardship that prevents them from being able to fully repay their debts. Often these same individuals have already tried unsuccessfully to meet the terms of a debt management plan or have previously sought the help of a credit counselor. Debt settlement is a very serious step and usually one that is taken to avoid declaring bankruptcy.
Q: What types of debts can I settle?
A: Most of the time debts that are unsecured are good candidates for a debt settlement. That’s because unsecured credit or loans do not involve collateral, which would allow the creditor to repossess an item of value. Such unsecured credit includes medical expenses, utility bills and credit card debt. Debt secured by collateral such as a car loans or a home mortgages are not generally eligible for debt settlement discussions.
Q: What are debt collectors prohibited from doing under the Fair Debt Collection Practices Act?
A: Prohibited acts include: making threats or use of violence or criminal acts, use of obscene language, publishing deadbeat lists (communicated with third parties regarding your obligations), advertising debt for sale to coerce, continuously calling with intent to annoy, harrass or abuse, and making false or misleading misrepresentations, among others. Please consult with an attorney if you believe your rights under the FDCPA have been violated.
Bankruptcy
Q: I've heard that the changes made to the bankruptcy laws in 2005 made filing for Chapter 7 nearly impossible, is this true?
A: The changes in the law certainly created more stringent standards. To determine whether you're eligible for Chapter 7 Bankruptcy, the "Means Test" must be applied. The purpose of the Means Test is to determine whether you have the "means" to enter a 5 year repayment plan (Chapter 13) by comparing your income with your necessary expenses. Those who do not have the means, qualify for Chapter 7 or a 3 year repayment plan under Chapter 13.
Step 1 is to compare your income with that of the state-specific median household income according to the Census Bureau data which is updated annually. As you can see in the chart below, the median income for a family of two is $65,097. If you are part of a two-person household and the total household income is less than $65,097, you would be eligible for Chapter 7 Bankruptcy or a 3 year repayment plan under Chapter 13.
Median family income CA (2009)
| Number of persons | Income |
| 1 | $49,182 |
| 2 | $65,097 |
| 3 | $70,684 |
| 4 | $79,971 |
* Add $6,900 for each individual in excess of 4 persons
If the total household income is greater than the median, you must move onto Step 2. Step 2 is to take your total monthly income, deduct your monthly necessary living expenses and multiply that number by 60. The resulting number represents the amount of available income to pay debt obligations over 60 months, or 5 years. If that number is greater than or equal to $10,000, you are not eligible for Chapter 7 Bankruptcy.
However, if the resulting figure from Step 2 is less than $10,000, you must move onto Step 3. Step 3 is to compare the figure from Step 2 with the total amount of your debt. If the figure from Step 2 is greater than 25% of your total debt, you are not eligible to file Chapter 7, and if it is less than 25%, you are eligible.
The Means Test is cumbersome and you probably need the help of a qualified Bankruptcy paralegal or attorney to perform the test. This is especially true because the necessary living expenses in Step 2 is a combination of predetermined national and local standards along with your actual living expenses.
Q: How long will a bankruptcy remain on my credit report?
A: The Fair Credit Reporting Act provides that bankruptcies can remain on your credit report for 10 years from the date of your bankruptcy filing. The major credit reporting bureaus usually report Chapter 7 cases for the entire 10 years and Chapter 13 cases for only 7 years. However, not all hope is lost. Bankruptcy eliminates some or all of your debt which gives you more available income, which in turn makes you more attractive to potential lenders.
Q: Who will know that I filed bankruptcy?
A: Your bankruptcy will appear on your credit report for 7-10 years (see above). Bankruptcy court records are a matter of public record. So if someone wanted to find out if you filed for bankruptcy, that person could probably find out by doing the necessary legwork.
Q: I’m not an American citizen, can I still file for bankruptcy?
A: Yes. Neither citizenship nor formal resident-alien status is required. As long as you have property or a business in the U.S., you are eligible. “Property” does not have to be real property; it can be other property, like a bank account.
Q: How much does credit counseling and debtor education cost?
A: Credit counseling costs $30 to $75 dollars and debt counseling costs $35 to $100 depending on the agency. Please see our "Resources" page for a list of prices for all approved agencies that provide credit counseling and debtor education courses to California debtors.