May 05, 2022
Summary: Are you having trouble paying off your debts? Not sure if it will ever go away? Learn how you can liquidate debt by eliminating it or negotiating to pay it off faster.
Are you having trouble paying off credit card debt, a mortgage, or an auto loan? Have you just had a salary cut and can no longer meet all of your monthly expenses? If so, it may be time to liquidate your debt. Like companies that have liquidation sales, personal debt liquidation involves selling assets to reduce or pay off a debt owed. You can do this voluntarily after examining different options or filing for bankruptcy. Be sure to investigate your options before converting any of your assets to cash to liquidate your debt. Here's SoloSuit's guide on how to resolve your debt through liquidation. Let's take a look at your options.
Before looking at the different debt liquidation options you can explore, you will need to determine how much debt you need to pay off. Contact your creditors and find out if they are willing to negotiate friendly terms of payment. At this point, the objective is to improve your financial condition by freeing up some cash. If your creditors do not agree to this arrangement, you can execute the following strategies.
If your total debt is less than $250,000, a consumer proposal may be the option for you. The proposal is a plan to pay creditors a percentage of the money you owe or extend the time for repaying debt. It's the most preferred option if you don't want to file for bankruptcy.
If the creditors accept the proposal, you can keep your assets, including savings, cars, houses, investments, among others. It also requires debtors to appoint a Licensed Insolvency Trustee, LIT, to help them divide the money among creditors. This trustee is the only professional allowed to administer government-related insolvency proceedings that enable the debtor to be discharged from debt.
A consumer proposal is one such proceeding hence the need to appoint the trustee. The professional helps you develop a proposal to woo your creditors. The LIT then presents the request along with a report of your situation explaining the causes of your financial difficulties.
The law requires the creditors to respond within 45 days. The LIT also files the proposal with the Office of the Superintendent of Bankruptcy, or OSB, which stops creditors from using other methods to recover the debt. Once filed, creditors must stop actions like filing for wage garnishment orders or lawsuits.
Once you meet all the payment terms and conditions, you will be released from debts indicated on the proposal. Under the law, the debtor should take a maximum of five years to make payments set out on the proposal.
If the creditors reject the proposal, your trustee can help you make a few changes to make it appealing to creditors. Alternatively, you can explore other options to solve your financial hardship, like filing for bankruptcy.
Before selling off your assets, you may want to consider withdrawing money stashed in 401k funds, financial investments, IRA accounts, and applicable life insurance policies. Withdrawing cash from retirement accounts like IRA and 401k accounts before maturity has short-term and long-term effects.
A 10% penalty tax is charged in addition to the income tax charged to the amount withdrawn. The IRS treats such withdrawals as regular income hence the high tax rate. If you choose to withdraw from a life insurance policy, the original maturity period is reduced, minimizing the surrender value.
Insurance companies offer two ways of cashing in traditional life insurance policies: you can convert it to a paid-up policy or apply for an exit policy to get the surrender value. Both options will help you pay off all or a portion of the debt but leave your dependents without a life insurance cover.
It may be in your best interests to enlist the help of a credit counseling agency to help you negotiate payment plans with creditors. Once a plan is set up, you can make monthly payments to the agency, which distributes the money to creditors.
The premise for making a debt management plan is to simplify repayment. Unlike a trustee, a credit collection agency doesn't negotiate the amount of debt owed to your creditors. The agency only arranges details like monthly payments, a waiver for fees charged, and interest rate reduction.
This is an arrangement to pay an amount less than what you owe to settle a debt. Third-party companies offer this service by offering to negotiate a settlement with the creditor. While debt settlement helps you pay the debt, it causes your credit score to drop significantly. The creditor is likely to report that the debt was settled, affecting your credit score.
If you've been sued for debt, you should file an Answer to the lawsuit to start. After filing an Answer, you can begin the settlement negotiation process by sending a Debt Lawsuit Settlement Letter to the creditor or debt collector.
If you are dealing with a debt buyer — someone who bought your debt from the original creditor — then they will probably accept a settlement between 1%–50% of the amount they're suing you for. On average, debt collectors buy debts for 8 percent of the face value of a debt. Meaning if they settle for 10 percent of the debt, they will earn 2 percent. If you are dealing with the original creditor, they will be less willing to settle for a low amount. You may be able to settle for 20%-70% of the debt.
Put together a realistic offer based on your finances and the debt itself. If you can't afford a lump sum payment, then monthly payments may be your best option.
For tips and tricks on negotiating a settlement offer, check out this video:
Explore either of the methods highlighted to liquidate the debt. Be sure to assess your financial situation first to determine what works best. If you are struggling to come up with the money look at your valuable possessions. What can you sell that would not be detrimental to your life?
While it's definitely not the ideal option, you can always consider selling some of your possessions to cover the debt in cash. For example, if you have any old cars sitting around in your driveway or garage, consider selling it for cash and using the money towards paying off your debt.
Some others assets you might consider selling are old jewelry, antique household items, old tech like computers, phones, or televisions.
Ask yourself which possessions are absolutely necessary and which you could go without. Liquidating your assets is a great way to start paying off debt, and it might buy you the time you need to find other more feasible ways to pay your debts (like picking up a second job, finding a better paying job, etc).
As highlighted earlier, a consumer proposal applies to debtors who owe less than $250,000. If you owe more, you can file a different type of proposal- the 'Division I' proposal. However, if the creditors reject it, your last resort may be to file for bankruptcy if you cannot use other methods to pay off your debts.
A Licensed Insolvency Trustee also presides over this process because it's a government-regulated insolvency proceeding. The professional helps you complete the bankruptcy forms that are presented at the Office of the Superintendent of Bankruptcy (OSB) for review once filed. Once accepted, you'll be declared bankrupt, which means:
Once you're declared bankrupt, the court goes ahead to discharge you from debt. A bankruptcy discharge releases the debtor from the legal obligation to repay debts owed. However, not all debts are dischargeable. The law requires debtors to continue making support payments, paying for alimony, penalties, and restitution orders.
Being in debt can make you feel like you have no options. It's a stressful and often lonely process. We hope these insights give you a few ideas on how you can effectively liquidate debt and become debt-free.
SoloSuit makes it easy to respond to a debt collection lawsuit.
How it works: SoloSuit is a step-by-step web-app that asks you all the necessary questions to complete your answer. Upon completion, you can either print the completed forms and mail in the hard copies to the courts or you can pay SoloSuit to file it for you and to have an attorney review the document.
"First time getting sued by a debt collector and I was searching all over YouTube and ran across SoloSuit, so I decided to buy their services with their attorney reviewed documentation which cost extra but it was well worth it! SoloSuit sent the documentation to the parties and to the court which saved me time from having to go to court and in a few weeks the case got dismissed!" – James
Here's a list of guides for other states.
Being sued by a different debt collector? Were making guides on how to beat each one.
Is your credit card company suing you? Learn how you can beat each one.
Need more info on statutes of limitations? Read our 50-state guide.
Need help managing your finances? Check out these resources.