A Paraphrase of the Lord's Prayer
"Yea, though I walk through the valley of the shadow of debt, I will fear no evil."

Hindsight Is A Bugger

Between February 7th & 18th, 2015, I updated some minor information. Otherwise, this site was last updated on April 15, 2012. And, the site was heavily edited down to the basics. Further updates will occur only if new and/or important information requires it. First, a brief note. When I use the term "debt servicing plan," I use it to mean any plan calling itself a debt management plan, a debt consolidation plan, or a debt settlement plan.

Back in 2005, I was a recently divorced man. The court order specified that I was responsible for my debts and my ex was responsible for hers. And, I was comfortably handling my own debts. Unfortunately, my ex filed a Chapter 7 bankruptcy - and I learned a hard lesson. In my state, the court order was superseded by community property law (sigh). And my ex's creditors came after me like white on rice.

I found I was deeply in debt (mostly my ex's debt) and was getting daily calls or letters from angry creditors. And, they had a right to be angry. If a person makes a debt obligation, they're obligated to settle it. Period. I've never been the kind of person to whine or make excuses about such things - even though I thought it was unfair that some of my ex's debts were now mine. So, I decided to take the bull by the horns.

Literally anyone in the credit field advises you to avoid bankruptcy at all costs. They say it will leave a semi-permanent bad spot on your credit file that will take years to clear (implying that debt servicing won't do the same thing). And back in 2005, I fell for that advice.

I contacted a debt servicing plan (name withheld). They said they could help me. And, they set me up on a monthly payment plan that would address all my debts in a responsible manner. The plan was livable - so, I went for it. Mind you, this was a "free" service of the debt servicing plan. In that respect, they were totally honest with me. But in many other respects, they were dishonest. Not overtly, of course. It was more along the lines of "lies by omission." In short, while they told me the "truth" about my debt situation and their plan to fix it, it wasn't the "whole" truth - nor was it "nothing but the truth." Still, the daily calls/letters from creditors stopped - and I lulled myself into believing that everything was on a good course.

The whole truth didn't become clear to me until 2006. After diligently making 10 months of payments into this plan, I received a summons by registered mail. One of the creditors decided to take me to court ... demanding much higher payments direct to their attorney. And not long after, the attorney for another creditor contacted me. No summons, but he did threaten court action unless I also agreed to much higher payments direct to him. In shock, I contacted my debt servicing plan. They said they would see what they could do (uh-huh) but otherwise told me, "Well, we can't make any promises." No kidding.

Bottom line? The advice to "avoid bankruptcy at all costs" is not advice that comes from a benevolent entity that cares about debtors. This advice comes directly from creditor groups who financially support these "plans." Why? Because it leaves creditors in the "driver's seat" - allowing them later to, on a whim, "change their minds" about the plans and pursue you directly. And these "plans" have no sway with them if that's what they choose to do.

In June 2006, I filed for Chapter 13 bankruptcy protection. And my attorney told me that, had I not done so, creditors would have been free to slap leins, judgements, and garnishment orders on me. But effective on the day I filed, I was REALLY protected from all negative actions by all creditors. And my attorney told me that, in many cases, these so-called debt servicing plans are just what the creditors want people to get into - because they know it leaves them in the driver's seat.

Do debt servicing plans ever work? Sure. Sometimes. But it all depends upon the nature of the debt and the demeanor of creditors and their attorneys - which can change from one day to the next. So, if you want a "maybe" or "perhaps" solution to your debt problems, that's up to you. Personally, I prefer the absolute solution - Chapter 13 protection.

Here's one dirty little secret these "plans" won't tell you. As soon as you sign up for one of them, your plan contacts the creditors. And the creditors put a note in your credit file with all credit reporting agencies. That stigma is just as bad as a bankruptcy. Creditors look at "plan" involvement and "bankruptcy" as equal stains. Further, while credit reporting agencies are required to remove Chapter 13 notations from a credit file 7 years after the filing date, they are not under any obligation to remove negative information resulting from a debt servicing plan (there's no time limit). So by choosing a debt servicing plan, you're NOT making your credit file look any better than if you'd filed bankruptcy. In fact, since there's no time limit on removing negative notations from "plan" involvement, you may even be making it worse. So MY advice to you is:

Avoid debt servicing plans at all costs!

One other danger of debt servicing plans needs to be noted. Both debt servicing plans and Chapter 13 bankruptcy are similar in one respect. They can get some creditors to lower their debt demands ... "voluntarily" under a debt servicing plan, "involuntarily" under a Chapter 13. But this act of debt forgiveness is where the similarity ends.

Let's say you have $30,000 in debt in January of a given year. You then rush into the arms (aka "clutches") of a debt servicing plan for help. And let's say your debt servicing plan comes to you, all smiles, and says, "Guess what? We got your creditors to forgive two-thirds of your debt! You now only owe $10,000!" Party time, right? Wrongamundo. But you won't find out the truth until the same time next year.

You're happily paying down the $10,000 debt when, come next January, you start receiving 1099C forms in the mail from your forgiving creditors. They've written off $20,000 of your debts and taken a tax deduction because of it. Therefore, YOU must now shoulder the tax burden - because each one of these forms reports "ordinary income" to the I.R.S. That's right, you now have to report $20,000 of extra ordinary income on your 1040 form for the prior year. Click HERE if you think I'm making this up.

Chapter 13 filers "may" also receive 1099C forms. Most of the time, they don't. It's considered a waste of the creditor's time and paperwork. I didn't get ANY after my Chapter 13 (grin). But, if I had received them, click here and look at block #6. If block #6 shows the letter "A" in it (the "event code" for bankruptcy), the debt cannot be counted as ordinary income. In I.R.S. lingo, a person filing Chapter 7 bankruptcy is an insolvent person who cannot repay any of their debts - and a person filing Chapter 13 bankruptcy is an insolvent person who "can" repay debts over a period of time determined by the bankruptcy court (3 or 5 years). In both cases, the word "insolvent" (broke) is the key word. And forgiven debts are not counted as ordinary income if insolvency is proven. So, a Chapter 13 filing is a "gimme" - and no further proof of insolvency is needed.

From page 5 of I.R.S. Publication 4681, quote:

Debt canceled in a title 11 bankruptcy case is not included in your income. A title 11 bankruptcy case is a case under title 11 of the United States Code (including all chapters in title 11 such as chapters 7, 11, and 13), but only if the debtor is under the jurisdiction of the court and the cancellation of the debt is granted by the court or occurs as a result of a plan approved by the court.
But, if you have no bankruptcy (and are under a debt-servicing plan), your work is cut out for you. You must prove (to the satisfaction of the I.R.S.) that you were insolvent on the day you began plan participation. This proof, on form 982 (and accompanying worksheets), must be submitted to the I.R.S. along with your 1040 (and, of course, all 1099C forms). But, there's "no guarantee" that the I.R.S. will accept your explanation as proof of insolvency. In short, it's another "maybe" or "perhaps" solution to a debt problem.

In July of 2011, my Chapter 13 bankruptcy was discharged after a flawless 5-years of making trustee payments on time. I'm now debt-free. And what's better is that no prior creditor can contact me about these debts anymore. That is NOT TRUE of debt servicing plans. You might complete your plan. But a creditor, at their discretion, could contact you later saying you owe them more money on the debt (for interest, collection fees, attorney and/or court fees, etc., etc.). On the other hand, if a creditor contacts a prior debtor for any reason after a Chapter 13 bankruptcy is discharged, they'd be in violation of a U.S. District Court order and subject to contempt of court proceedings against them.

So, if you find yourself in the same situation I was in back in 2005, "get thee to a Chapter 13 attorney" with all possible speed. Do NOT buy one of those do-it-yourself kits. One simple mistake could be the costliest mistake you ever make. Go to a pro. It might not be as expensive as you think. Contact your local legal aid society. They might be able to refer you to a low-cost attorney. The society might even have programs in place to help persons with low incomes defray some of the costs.

In closing, I should say there is one exception to my advice ... but only if you live in the state of Wisconsin. Wise lawmakers in the state devised their own plan for helping consumers in debt ... their Chapter 128 plan. Like a Chapter 13 bankruptcy, debtors are required to repay their debts over a timeframe ordered by the court. And, Chapter 128 debtors are protected from creditors by a court order. It just avoids all the Federal bankruptcy restrictions and rules. So, if you're in Wisconsin, lucky you (grin).


Be sure to check with a trustee on what to do if you receive the dreaded 1099C forms in the mail. Does the I.R.S. recognize Chapter 128 filers as legally "insolvent?" Remember, this is a "state" legal protection, not "Federal" - and the letter "A" will not be in block #6 on any of your 1099C forms. My "guess" (and it's only a guess) is that the letter "B" will appear in block #6. "B" is the event code for "Other judicial debt relief." It's best to be sure, though.

February 2015 Update

It's been 9 years since I filed my Chapter 13. Following discharge, I wanted to hit the ground running to rebuild my credit. So, I applied for (and received) a secured VISA card from one of my credit unions with a $1,000 credit limit. And after a year's worth of on-time payments, they converted it to an unsecured VISA card. In July 2013, my Chapter 13 passed the 7-year mark (from filing date) and all credit reporting agencies dropped "every" notation from their credit files (as required by law). So, armed with a clean credit history and a good track record on one VISA card, I began applying for other credit cards.

As of this month, I now have 14 credit cards - all unsecured and none with an annual fee. The combined credit limit on these cards exceeds my annual income. They include 1 Chevron/Texaco gas-company credit card, 1 PepBoys credit card (auto-repair), 1 American Express credit card, 1 Discover IT credit card, 5 MasterCards, and 5 VISA cards. But it is not my intention to get back into debt trouble. My debt-to-income ratio is only 3% and my utilization rate is under 5% on all cards. I only charge enough on them to keep them "active" because card companies will cancel unused cards. In addition, keeping them active every month forces card companies to "report" every month. Since I tend to pay the balances off in full on the date I receive the invoice (not waiting for a "due date"), their reports are always "good" reports (and I avoid paying interest). My Equifax credit score = 748.

My ex-wife has one VISA card upon which she pays a hefty annual fee. Her utilization rate and credit score are things I don't know. But the difference between us is simple. She's always thought of credit as a means to enhance her lifestyle. I've always thought of credit like the handle on a fire-alarm - to be pulled only in case of an emergency. In short, my credit cards are my "safety-net" - protecting me from having no financial options if unforeseen bad things happen. And the broader the safety-net, the better. I also thank my lucky stars that my ex's debts will never be mine again.

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P.S. Back when I was under my own debt-servicing plan, I had a forum account at debtconsolidationcare.com. And, I posted my website address there on many occasions without any complaint from forum moderators. However, since my personal debt situation had been solved by a Chapter 13 filing, and after posting to different threads of my initial experiences, I decided to take a powder on forum posting and quit the forum.

But, I later re-joined the forum. And the only difference between the two timeframes of forum membership was that my opinions on debt servicing plans had changed considerably. Obviously, their site moderators saw what's here - and they decided to lock me out. Why?

They didn't tell me. But look at the name of their website. They're obviously "pro-plan." And their site has a link-list to about 200 plans. My site, on the other hand, is "anti-plan."

Anyway, my first post after re-joining the forum was locked and my website address deleted from the message. And at the bottom of this message was this curt retort:

guess what links to sites that are not approved by the admins is considered soliciting,and not only your former link but this one qualifies.get lost!!!!!!!!!! paulmergel
I then posted a 2nd message, this time without the website address. Minutes after posting it, it disappeared from their forum. But later it reappeared - with one interesting feature added to my account. I was allowed to log on to my account. But as soon as I switched over to a forum area to make a post, I was automatically logged out. In short, I could no longer post to the forum. And shortly afterward, the disappearing/reappearing post disappeared again. Gee, I guess they didn't like what I had to say about debt servicing plans (grin).

Oh, well. This site has been up since 2005 ... and it will probably still be up years from now. And it never has been nor will it ever be a website that "solicits" anything - except perhaps common sense.


Click here to contact me.