Episode Description - How to Navigate Debt, Divorce, and Bankruptcy
Feeling buried in debt can make you believe you have no way out … and that’s exactly when you make the biggest financial mistakes. In this podcast episode, attorney William (Bill) Mitchell draws on decades of experience helping both consumers and debt relief companies to explain why so many people end up overwhelmed by debt, and why the right solution depends on your specific financial situation.
Instead of treating debt relief as a one-size-fits-all problem, Bill breaks down the four primary options available for getting out of debt, from debt consolidation loans and credit counseling to debt settlement and bankruptcy. He also explains which option is best for which situation. Bill reveals how rising credit card interest rates, aggressive marketing, and common misconceptions can quietly trap people in a cycle that becomes harder to escape the longer they wait.
The discussion goes beyond debt relief to explore real-world financial decisions that can have lasting consequences, especially during major life transitions like divorce. From handling joint credit card debt and protecting your credit to avoiding predatory debt relief companies and choosing the smartest way to borrow money in a crisis, you'll come away with practical insights that could save you thousands of dollars—and help you make better financial decisions when the stakes are highest.
Show Notes
About Bill
William R. (“Bill”) Mitchell is a seasoned attorney with more than two decades of experience helping individuals and businesses find financial freedom and stability. A nationally recognized expert in debt relief and settlement, Bill has guided thousands of consumers toward reducing or eliminating their debt burdens. As one of the few lawyers who has represented both major debt resolution companies and the consumers they serve, he brings a unique 360-degree understanding of the industry to his advocacy. Beyond debt relief, Bill is a trusted business attorney who advises small and mid-sized privately held companies on everything from business formation and financial transactions to contract negotiation and dispute resolution.
Connect with Bill
You can follow Bill on YouTube at @LegalEdgeDebtSolutions and on Instagram at legaledgedebtsolutions. You can also purchase his book, Say Goodbye to Credit Card Debt: How to Outsmart the Banks and Avoid Their Traps on Amazon.
Key Takeaways From This Episode with Bill Mitchell
- In 2022, average credit card interest rates sat around 14.6%, but they have ballooned to 21%–22%. While banks borrow directly from the Federal Reserve at low rates of 3%–4%, they have sustained record-high profit margins by refusing to lower consumer interest rates even as inflation cools.
- When a consumer is drowning in credit card debt, there are exactly four proven legal and financial paths out: Chapter 7 bankruptcy, loan consolidation, credit counseling, and debt settlement. The right choice depends strictly on an individual's total asset equity, debt volume, and credit score.
- While Chapter 7 entirely liquidates unsecured debt, Chapter 13 forces a consumer into a rigid, multi-year payment restructuring plan managed by a court trustee. Chapter 13 has a 98% failure rate when filed without a lawyer, and an alarming 53% failure rate even with legal counsel, because most consumers cannot sustain the monthly payments.
- In credit counseling, a client aims to protect their credit score by paying back 100 cents on the dollar via a lower, restructured interest rate. In debt settlement, a client intentionally stops paying their credit cards to build up a lump sum, forcing creditors to negotiate a principal reduction where the client settles the debt for 60%–65% of what was originally owed.
- If a consumer needs immediate funds to retain a divorce attorney, credit cards should be the absolute last resort due to compounding 21% interest rates. Borrowing from a family member is the best option, followed by a home equity line or borrowing from a 401(k)—where trading a one-time 10% early withdrawal penalty is far cheaper than carrying credit card debt.
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Transcript
How to Navigate Debt, Divorce, and Bankruptcy
SPEAKERS
Karen Covy, Bill Mitchell
TRANSCRIPT
Karen Covey: Hello and welcome to Off the Fence, a podcast where we deconstruct difficult decision-making to try to figure out what keeps us stuck, and more importantly, how do we get unstuck? I'm your host, Karen Covey, a former divorce lawyer, mediator, and arbitrator turned coach, author, and entrepreneur.
With me today, I have the pleasure of speaking with Bill Mitchell. Known for his strategic thinking, sharp intellect, and unwavering advocacy, Bill Mitchell is a seasoned attorney with more than two decades of experience helping individuals and businesses find financial freedom and stability. A nationally recognized expert in debt relief and settlement, Bill has guided thousands of consumers toward reducing or eliminating their debt burdens. He's one of the few lawyers who has represented both major debt resolution companies and the consumers they serve, giving him a 360-degree understanding of the industry. Beyond debt relief, Bill is a trusted business attorney who advises small and mid-sized, privately held companies on everything from business formation and financial transactions to contract negotiation and dispute resolution. He's also the author of Say Goodbye to Credit Card Debt: How to Outsmart the Bank and Avoid Their Traps.
Bill, welcome to the show.
Bill Mitchell: Happy to be here, and happy to help your listeners.
Karen Covey: I am really excited because I think that you can help a lot of people. I'd like to start with your backstory: what got you into the world of debt relief?
Bill Mitchell: As you mentioned in that glowing introduction, I'm a business lawyer, and business lawyers follow their clients. If a client comes in and owns an auto repair shop, next thing I know, I'm handling legal and business issues related to auto repair. One of my clients was very entrepreneurial and got into the debt relief business about 20 years ago. Ironically or coincidentally, I had lunch with him again this week.
Not a lot of lawyers did any work in debt relief 20 years ago. I learned a lot about his business, and when you become a modest expert, you get referrals from other clients. Next thing you know, you become an actual expert. That's how I did it: I started working with debt relief companies, solving their problems and dealing with the issues they had.
Eventually, it progressed to where I started my own law firm to represent consumers going through debt relief. That was eye-opening because previously my client was the company trying to get customers, and now I'm talking to clients who are the customers. It's a completely different perspective, so when you said in the introduction that I have a 360-degree view, that is exactly what happened.
Karen Covey: Knowing how the whole system works rather than just one side of it is incredibly valuable. Debt is something that a lot of people contemplating, going through, or coming out of a divorce have to deal with. They face debt they might not have anticipated, and it can be pretty substantial. If someone finds themselves deeply in debt and drowning in it, what can they do?
Bill Mitchell: Most people don't appreciate how easy it is to get into debt. Part of what I outline in my book, Say Goodbye to Credit Card Debt, is how the banks slowly but incrementally built a system that encourages consumers to spend more than they have and made it highly convenient to do so. If you watch TV, they hire celebrities with the highest credibility ratings, like Jennifer Garner and Samuel L. Jackson, to tell you how much fun it is to charge it on your credit card and get rewards. They make you wonder why you aren't charging everything.
It's easy to fall into debt, and when people feel overwhelmed by it, they feel trapped, certain, and full of shame. But the good news is that there are four options available out there, and they all work. If you find yourself in debt, your only trick is to determine which of those four options works best for you.
Karen Covey: That's really interesting. Let's dive into what those four options are.
Bill Mitchell: They are straightforward: Chapter 7 bankruptcy, loan consolidation, credit counseling, and debt settlement. You can view them incrementally. If you are only in a little bit of debt from a temporary financial issue, still have a credit score over 700, and have equity in your home, your best choice is probably a loan consolidation. You take all your high-interest credit card debt and turn it into a loan at a lower interest rate, which gives you immediate payment relief.
At the other end of the spectrum, if you don't have equity in your home, are buried in debt, and have no ability to pay off the principal balance, you want to look into whether you qualify for Chapter 7 bankruptcy. That allows you to flush most of that unsecured debt down the toilet.
Credit counseling and debt settlement fall into the mid-range, and each has its own qualifying factors. On my website, Legal Edge Debt Solutions, I created a confidential, free assessment consisting of about 19 questions. By answering those questions, it will analyze your data and tell you what your best solution is and why. You aren't locked into following the suggestion, but it helps educate you so you can make the best decision for your situation.
Karen Covey: Let's back up a little bit. I heard you say there's everything from Chapter 7, which is a complete liquidation bankruptcy to wipe your debts clean, to consolidation and restructuring, and everything in between. As a lawyer, I know there are multiple chapters in the bankruptcy code. People might have also heard of Chapter 13. Where does that fall on your continuum, and is it something you recommend?
Bill Mitchell: That is a fabulous question. Chapter 7 is a liquidation bankruptcy, while Chapter 13 is a reorganization bankruptcy. You have to qualify for Chapter 7.
However, let me share some statistics on why I do not recommend Chapter 13. If you attempt to file it without an attorney, the failure rate is 98%. Even when a case gets filed successfully without being immediately dismissed, 53% of those cases ultimately fail. This is because in a reorganization, they create a payment plan indicating how much you must pay every month to a trustee, who then distributes the money. Over half of consumers cannot sustain that payment plan. When you fail to make the payments, the case is dismissed, you go back to square one, and you often end up worse off because you wasted time and money.
That's why I almost never recommend Chapter 13, and why you should look at credit counseling or debt settlement instead. The core difference is that debt settlement reduces your total amount of principal debt. If you cannot pay back the full balance, you go to debt settlement. If you want to protect your credit score, believe you can pay back the full balance, and just need the debt restructured, that's credit counseling.
Karen Covey: If I'm an average consumer in credit card debt up to my eyeballs, the problem is that the interest rates are insane. Even if I'm paying the minimums, I'm never going to get out of it. What I need is someone to lump everything together, lower the interest rate, and let me make steady payments. Is that something I can negotiate myself, and how do I go about it, or should I hire a professional?
Bill Mitchell: You said two things that are very important. Credit card interest rates are absolutely insane. By comparison, in 2022, the average credit card interest rate was 14.6%. It is now averaging around 21% to 22%.
Karen Covey: Why did it go up so much?
Bill Mitchell: The simple answer is greed. When inflation started to rise, the banks increased their interest rates. But when inflation came back down, they didn't lower them.
To look at the technical side, banks borrow money directly from the Federal Reserve. The lending rate for banks is surprisingly low—only around 3% or 4%. So, banks are borrowing from the Fed at 4% and lending it out to consumers at 21%. The profit spread that banks are making right now between what they borrow at and what they charge consumers is the highest it has ever been in history.
We are currently facing the highest amount of total credit card debt ever, the highest interest rates ever, and the highest average balances consumers have ever carried. The average credit card balance is hitting $6,700 a month, whereas just a couple of years ago it was $5,800. We also have the highest rate of credit utilization in our history. If you have a credit limit of $5,000 and carry a $2,000 balance, your utilization is 40%. The credit card problem is actively getting worse, and banks are making more money off of it.
To directly answer your question: if you just need to restructure your debt because you can pay the total balance but need to reduce the rate and get collectors off your back, that's credit counseling. That works on specific criteria, and it won't negatively impact your credit score the way debt settlement does. If you do not have the ability to pay back the full balance, you look at debt settlement.
Karen Covey: What is the structural difference between debt settlement and credit counseling?
Bill Mitchell: In credit counseling, you aren't asking creditors to take less money on the total principal balance. You are going to pay back 100 cents on the dollar, but you are restructuring the payments, lowering the interest rate, and spreading those payments out over a longer period of time. In debt settlement, you literally stop paying your credit card altogether. Then you, or a third party, negotiate a principal reduction so that you end up paying back 60 to 65 cents on the dollar to achieve true debt relief.
Karen Covey: To play devil's advocate, why wouldn't every consumer want that? Why wouldn't everyone want to pay less on their debts?
Bill Mitchell: Because I talk to people every day, and many feel a strong moral obligation to pay it back. This is especially true for the older generation. I will talk to consumers whose only income is Social Security, yet they are aggressively trying to pay back massive credit card debt. I have to tell them to take a timeout and ask why they are giving their finite, hard-earned income to wealthy credit card companies.
The catch with debt settlement is that it is an aggressive move. You have to stop paying your cards, withstand the onslaught of collection calls, save up a lump sum of money, and then negotiate. Can it be done? Yes. In fact, about a third of my book, Say Goodbye to Credit Card Debt, is a step-by-step plan on how to settle your own debt. It talks about why you might use a third party versus doing it yourself, and exactly how to execute it if you choose the DIY route. You can buy it on Amazon, or you can download it completely for free on my website.
Karen Covey: That's a perfect example of doing things the smart way to leave money in your pocket. Let's say a consumer is facing a mountain of debt, wants to reorganize, but is getting bombarded with collection calls. I've had clients where collectors call them all hours of the day and night. How can an average consumer handle that situation and get creditors to stop calling constantly?
Bill Mitchell: That's exactly why a lot of people hire a third-party debt settlement company. That company will send a letter directing all calls and communications to them, though creditors may or may not always comply. Because of that, a lot of consumers prefer to use a law-firm-backed debt relief company, which is why I got into this specific business. When a creditor gets a letter from an attorney stating, "I represent this client, do not call them again," by law, they have to stop calling you.
Karen Covey: Having those calls stop can be totally life-changing for people. Let me throw you a curveball. Let's say someone is in the middle of a divorce or another intensive legal case, and their legal fees keep mounting. Their lawyer says, "If you don't pay me, I'll have to withdraw because I can't work for free". A lot of people will immediately try to open a new credit card to pay the retainer. Is that the best option, and what are the alternatives for getting necessary funds without drowning in credit card debt?
Bill Mitchell: You've hit on a major trend. Part of how we've accumulated so much national debt is due to our consumer culture, which has caused a massive shift in our personal savings rates. When I was a kid, my grandmother took me down to the local savings and loan to open an account with 20 bucks, and I thought it was a million dollars. Back in the 1970s, the national savings rate was 11.6%. Today, the savings rate in our country is down to 3.6%.
Because people save less, the credit card has become the default magic bullet when they get into trouble. If you've had a horrible day and feel you deserve a nice dinner, or you face an expensive car repair, or you need to pay your divorce lawyer, you put it on the card. What the consumer doesn't fully appreciate in the moment is that they are adding a massive extra balance onto a card that likely already carried a fair balance, and they are now triggering a 21% interest rate on that entire amount. That's how you get trapped.
Karen Covey: Are there better options? If someone has the choice of taking a loan from a family member, using a home equity loan, or borrowing against a 401(k), what is the smartest approach? Can you rank them?
Bill Mitchell: If you have family members or friends who are willing to lend you the money, that is always the best option. Even a grumpy older sibling or a rich uncle will likely only charge you 5% or 6% interest—often just to cover what they would have earned leaving that money in an account—which is vastly lower than 21%.
Beyond that, if you have equity in your home or a 401(k) you can borrow from, those are viable alternatives. People always say, "Don't touch your 401(k)," but if you are in a high-stakes situation and need money to pay your lawyer to finish your divorce, you are better off borrowing from yourself rather than putting it on a credit card at 21% interest.
Karen Covey: A lot of people are rightly reluctant to touch their 401(k) because they worry about income tax and the 10% early withdrawal penalty. But what I hear you saying is that you're choosing between a one-time 10% penalty or a recurring 21% interest rate. Choose your poison.
Bill Mitchell: Exactly. I became a lawyer because I don't do math, but I think that's an 11% difference in your favor.
Karen Covey: Let's talk about a different problem. Let's say a couple has been living above their means, which happens often, and they've amassed a large amount of joint credit card debt. In the divorce, they simply divide up who is responsible for paying which card, but both of their names remain on the accounts. What are the hidden dangers of entering into an arrangement where they are tied to those debts post-divorce?
Bill Mitchell: If you are a couple with too much credit card debt, can work together constructively, and qualify for bankruptcy, you ideally want to flush that debt down the toilet before you finalize the divorce.
If you can't file Chapter 7 because your assets or income are too high, you have to divide it up. But just because a divorce judgment assigns the Chase card to you and the Nordstrom card to him, your name is still legally on that card as far as the bank is concerned. If your ex defaults, the credit card company is absolutely going to come after you for the full amount.
Karen Covey: What happens if a couple gets divorced, they have joint names on the debt, and then one ex-spouse declares bankruptcy down the road?
Bill Mitchell: The credit card company will immediately go after the remaining spouse for 100% of the debt because their name was on the account pre-divorce.
Karen Covey: So it sounds like the smartest thing for any divorcing couple to do is to pay off and close all joint debts during the divorce process so they aren't carrying any joint liabilities forward. Is that correct?
Bill Mitchell: Yes, that is 100% right, particularly if you suspect your ex might go sideways or play games later on.
Karen Covey: A lot of people are in a tight spot right now because mortgage interest rates have skyrocketed. They might have an existing home loan locked in at 3%, and neither spouse can afford to refinance and buy the other one out under current rates. They look at either selling the house or making an arrangement where one spouse stays in the home for a set period of time. If they also have a mountain of marital credit card debt, does it make sense to sell the house, wipe out all the debt with the equity, and start fresh—even if it means renting and not owning a home for a while? Or is it better to try to preserve the home and keep juggling the payments?
Bill Mitchell: Sometimes the best answer is: it depends. It heavily relies on how much equity you have. I am a divorced adult myself, and my ex-spouse and I worked out an arrangement where she stayed in the marital home for a period of time because it made logistical sense for us. In today's market, if you have a historically low interest rate, it often makes financial sense to buy time and let a spouse stay put for two or three years.
The critical danger, however, is if the person living there misses a mortgage payment or stops paying entirely. The other spouse will get the collection letters, and their credit score will get instantly dinged. It depends entirely on how much equity is in the home, your alternative means to pay off the credit card debt, and the fundamental ability of the two individuals to act like adults.
Karen Covey: Everything you're saying highlights exactly why a divorcing couple needs to talk to a Certified Divorce Financial Analyst (CDFA). They need someone who can look objectively at the spreadsheets, assets, debts, income, and expenses and map out the exact range of financial options, showing what makes sense long-term versus what will set them back.
Bill Mitchell: Correct. People frequently get divorced because the other person is a jerk, or worse. In the middle of the emotional fighting, they completely forget about very pragmatic financial issues that are best dealt with using a cool head. Protecting your long-term financial interests requires working through those practicalities rather than burning money arguing.
Karen Covey: In a perfect world, a couple works together to get through the divorce, handles the debts, and divides the assets cleanly. That isn't always possible due to a sour relationship, but even if you can't do it as a couple, any individual can hire a CDFA to look out strictly for their side of the equation. They can analyze your specific situation and give you strategic options even if your spouse refuses to participate. Knowledge is power.
Speaking of analyzing a situation, a massive number of couples today carry student loan debt. How does that function when you are facing a mountain of debt, and what are the reorganization options for student loans?
Bill Mitchell: That is a much tougher challenge because, under current law, you cannot flush a public student loan down the toilet through a standard bankruptcy. The banks are incredibly smart. Every time they foresee a systemic issue, they run to their friends in Congress to ensure all the windows and doors are locked tightly in their favor.
As a quick historical aside, it wasn't until a 1978 Supreme Court case that banks were legally allowed to charge these uncapped, sky-high interest rates. That ruling is what caused credit card usage to skyrocket in the 1980s and 1990s. As soon as consumer usage surged, underwriting became highly liberal, and defaults increased, the banks lobbied Congress to tighten the bankruptcy rules to make accessing Chapter 7 significantly harder. They don't miss a trick.
Karen Covey: Let's say you own a home on paper, are going through a divorce, but have a massive mountain of unsecured debt and very little equity in the property. Can you still file for bankruptcy if you own a home?
Bill Mitchell: Yes, but Chapter 7 bankruptcy is subject to a strict means test based on your income. Your household income must fall below your state's median average, and you cannot possess a significant amount of unprotected assets. They have intentionally limited the public's ability to access Chapter 7 liquidation.
If your equity or income is too high, you are forced into a Chapter 13 reorganization instead. But as I mentioned earlier, only about half of the people who file Chapter 13 ever succeed. If you can't do Chapter 7 and Chapter 13 is highly risky, you have to move back up the financial food chain to look at debt settlement or credit counseling. Alternatively, if your credit score is still over 700, you can secure a consolidation loan against the house to pay off the credit cards at a lower interest rate, which is the easiest off-ramp.
Karen Covey: Speaking of credit counseling and debt consolidation, there are thousands of companies out there. A lot of consumers get burned by choosing the wrong solution or falling in with predatory operations. What are the inherent dangers, and how does an average person know who to trust?
Bill Mitchell: When you are in financial trouble, it is immediately reflected in your credit history. The major credit reporting agencies—TransUnion, Experian, and Equifax—receive data on every single transaction from your mortgage company, car lease, retail accounts, and credit lines. Marketing firms can literally buy lists from these bureaus of every consumer in a specific zip code who missed their last credit card payment. That's why the moment you fall behind, your mailbox fills up with loan consolidation offers.
This is why it's vital to find a tailored solution rather than being aggressively sold a product. The companies mailing you those pre-approved loan offers frequently know ahead of time that you won't actually qualify for a loan.
Karen Covey: Then why on earth do they send the letter?
Bill Mitchell: To get you to pick up the phone. Once you call to ask about the consolidation loan, they execute a classic bait-and-switch: they tell you that you don't qualify for the loan, but seamlessly pivot to selling you a high-fee debt settlement program. If you are struggling to pay your bills and suddenly get inundated with loan offers, treat it as a massive red flag. They just want you on the phone so they can sell you debt relief.
I hear these heartbreaking stories from consumers constantly who were sold the wrong program that they didn't understand. That is exactly why I built my website, Legal Edge Debt Solutions. It hosts comprehensive educational content explaining these distinctions, alongside our 19-question assessment that generates an unbiased recommendation based entirely on your unique financial goals and criteria. It's a tool designed to be genuinely helpful.
Karen Covey: It sounds like if you are in financial trouble, instead of responding blindly to junk mail and falling into a trap, you should proactively take an independent assessment, map out the right strategy, and then seek out a vetted attorney or company to execute it.
Bill Mitchell: Correct. And whenever you are dealing with any debt relief company, look them up on Google and check their Better Business Bureau (BBB) rating. When you practice law, you Google opposing counsel the second you get a case letter to see how long they've practiced and if they actually know the field. You must do the same research on these companies to see if they have a history of complaints and how those complaints were resolved. If a company has a thousand complaints but handles a million customers, that ratio isn't actually bad, but checking gives you the vital context you need.
Knowledge is power, but then you have to act. When you are stuck in debt, waiting actively works against you because the banks are compounding interest at 21% every single month. Every month you delay, you are sinking deeper into the hole.
Karen Covey: Thank you so much for sharing your expertise with us today. If someone is feeling over their head and wants to take your assessment or connect with you, where can they find you?
Bill Mitchell: The website is LegalEdgeDebtSolutions.com. That gives you direct access to me, our explanatory videos, the free assessment tool, and a digital copy of my book that you can download at no cost. It is all designed to get consumers thoroughly informed about what their four options are so they can identify what works best for them. Once an option is chosen, we can also connect them with a vetted, credible, and verified vendor.
Karen Covey: Nobody wants to find themselves in this situation, but if they do, reaching out, taking the assessment, and initiating proactive action is the best way to become financially free again.
Bill Mitchell: To put things in perspective, the latest national statistics show that 13.2% of American consumers are currently 90 days late on at least one credit card payment. That means well over 10% of Americans—roughly 29 million people—are actively drowning in debt right now. If you are struggling, you have to realize that the consumer system was intentionally built to put you there. Your only job now is to figure out the strategic path to get out.
Karen Covey: That makes so much sense. Bill, thank you again for sharing your time and knowledge. For those of you watching and listening, if you enjoyed today's conversation and want to hear more, please do us a huge favor: give the video a thumbs up, like and subscribe to the podcast, subscribe to our YouTube channel, and I look forward to talking with you all again next time.
