If you are dealing with serious debt issues, such as creditors harassing you at all hours of the day and night, your home being in danger of foreclosure, or your car being in danger of repossession, you may be wondering what options you have for relief.
Thankfully, you can do a few things to get out of this position. Your options generally fall into two categories: debt relief and bankruptcy. In this guide, we’ll explain what both are and the benefits of each to help you make an informed decision about which, if either, you might want to try.
Debt relief refers to ways you can manage and settle your debts outside of the court system. When you stop making your loan payments, your creditors will eventually begin debt collection processes, after which you may begin negotiating with your creditors individually.
1. Debt Consolidation Loans
A debt consolidation loan is a loan that can pay off all of your creditors at once and leave you with only one payment moving forward. This is a good option for people who are overwhelmed with numerous debts from multiple loans and other creditors. However, debt consolidation loans can be risky because they sometimes have high-interest rates. If you mismanage them, you may end up in more debt than before.
2. Lump Sum Debt Settlement Payments
If you can offer your creditors a lump sum of money paid all at once, they will sometimes accept it even if it is less than what you owe in total. This is beneficial to creditors because they get their money back faster. Of all debt relief options, this is likely the least risky. However, it can also be the most challenging, as you will have to find a way to get the money to pay a lump sum.
3. Debt Management Plan / Debt Consolidation Companies
Another option for debt relief is to work with debt consolidation companies that negotiate with your creditors on your behalf to lower your payments as part of a debt management plan. It is worthwhile to note that these companies can be expensive, and not all creditors agree to work with debt consolidation companies.
1. You want to keep your financial affairs private.
Because bankruptcy is a public process settled within the court system, the fact that you are filing for bankruptcy will not be kept private. If you prefer your financial affairs to remain private, other debt-relief options may be better for you.
2. You Want to Retain Control
In bankruptcy, a bankruptcy trustee and the bankruptcy court take control over much of your finances and assets, and they can end up liquidating your non-exempt assets. If you prefer to retain control over your financial affairs, debt relief options such as debt settlement or consolidation may be better than bankruptcy.
3. You Want to Protect Your Assets
In Chapter 7 bankruptcy, your non-exempt assets will be seized and sold to pay off your creditors. With debt relief, nobody can force you to surrender any of your property to pay off your unsecured debt. That said, in cases of secured debts, such as a mortgage or payments for a vehicle you purchased with a loan secured by the vehicle, the home or vehicle may be subject to foreclosure and repossession.
4. You’re Worried About Your Credit Score
While debt relief may negatively affect your credit score, the effects of bankruptcy on it will be much more severe and can damage your credit score for a more extended period
While bankruptcy is technically also a form of debt relief, it is generally categorized separately because it involves the courts and can be initiated involuntarily, both for the debtor, who can be forced into bankruptcy by their creditors, and also for the creditors themselves, in that they may be forced to accept less (or none) of what they are owed. Exactly how this works depends on the type of bankruptcy the debtor files for.
1. Chapter 7 Bankruptcy
Chapter 7 cases are managed by a court-appointed trustee who oversees the liquidation and sale of the debtor’s non-exempt assets. The proceeds are used to pay off the creditors in order of priority after the trustee's fees and administrative expenses are paid. Specifically, secured creditors are paid first, followed by unsecured creditors with priority claims, and then general unsecured creditors.
Assets exempt from liquidation differ under state and federal laws, but generally include limited items of personal property, such as furniture and household items necessary to meet the debtor’s basic needs, and vehicles, tools, and equipment required for the debtor’s employment or business.
2. Chapter 11 Bankruptcy
In a Chapter 11 bankruptcy, insolvent businesses are given the opportunity to propose a reorganization plan in which they restructure their debts. The goal is for them to be able to pay off their debts while remaining in business and eventually becoming profitable again.
3. Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy, debtors with regular income in amounts that meet or exceed certain thresholds may propose a repayment plan for repaying their creditors over a period of three to five years. The plan may involve paying back all or a portion of their debts and is subject to the court's approval.
1. You Want a Faster Process
Chapter 7 bankruptcy can be one of the fastest ways to get out of debt, taking as little as a few months. This is significantly shorter than the years it can take for other debt relief processes to be completed.
2. You Want to Discharge All (or Most) of Your Debts
Debt relief isn’t guaranteed to work. Some of your creditors may not be willing to negotiate with you. Because of this, you may end up still having to pay some of your debts. But with bankruptcy, you will have all of your eligible unsecured debt discharged. (Or some of it in Chapter 13 bankruptcy)
3. You Want Relief from Debt Collection Efforts
One of the most overwhelming and challenging parts of being in debt is dealing with aggressive debt collectors who stop at nothing to be in touch with you to try to make you pay. When you file for bankruptcy, an automatic stay is issued, which requires creditors to stop their collection efforts. This can be a huge relief for people who have been harassed by debt collectors for months or even years.