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 in danger of repossession, you may be wondering what options you have for relief. 

Thankfully, there are a few things you can potentially do 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

What Is Debt Relief?

Debt relief, also called debt settlement, is a process of negotiating with your creditors to zero out your debt for less than what you actually owe. It is done outside of the court system. When you stop paying your loan payments, your creditors will eventually begin debt collection processes. After about four months of debt collection efforts, you can begin a negotiation process to settle with your creditors one by one. It usually takes between two and four years to complete the debt relief process. 

Types of Debt Relief

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 and confused by a large number of creditors and loans. 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 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 most 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 debt relief option 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. 

Signs You Should Seek Debt Relief

1. You Want Your Financial Affairs to Be Kept Private

Because bankruptcy is a public process settled in the courts, the fact that you are filing for bankruptcy will not be kept private. If you prefer your financial affairs to remain private, debt relief may be a better option for you.

2. You Want to Retain Control

In bankruptcy, you give control over your financial affairs to a bankruptcy trustee and the bankruptcy court. If you prefer to keep in control of your own financial matters, debt relief is probably a better option. 

3. You Want to Protect Your Assets

In Chapter 7 bankruptcy, your assets are seized and sold off to pay your creditors. With debt relief, nobody can force you to surrender any of your property. 

4. You’re Worried About Your Credit Score

While debt relief does affect your credit score, it isn’t as harsh as the effect of bankruptcy, and you can usually recover from it sooner. 

Bankruptcy

What Is Bankruptcy?

Bankruptcy is a legal proceeding in which a person who cannot pay their debts has some or all of their debts discharged while their creditors are paid as much of the money owed as possible. Exactly how this works depends on the type of bankruptcy the debtor files for.  

Types of Bankruptcy

1. Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, a debtor’s assets are seized and sold off, with the funds being used to pay off all of their creditors equally. Chapter 7 cases are managed by a bankruptcy trustee who oversees the bankruptcy estate. 

2. Chapter 11 Bankruptcy

In Chapter 11 bankruptcy, debtors 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 Chapter 13 bankruptcy, debtors with average incomes or higher make a payment plan for repaying their creditors. They may pay back all or some of their debt. 

Signs You Should File for Bankruptcy

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 usually takes for 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 to Stop 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.