Bankruptcy vs. Debt Relief: Which Option is For You?

Getting in debt is something that many people face because hardships and unexpected life events can happen to anyone — after all, we’re all humans! The goal for people in debt is to stabilize their personal finance and live a debt-free life. When you feel overwhelmed by debt and simply can’t repay it with your existing income, then you can either seek debt relief or file for bankruptcy.

Choosing between bankruptcy and debt relief programs can be difficult and you should have the support of a debt specialist who will review your financial situation and suggest the best action plan. Some people benefit from filing for bankruptcy, especially if they don’t own any property. For others, debt relief and debt settlement will work better and can quickly direct them toward a safer financial future.

Debt Relief

Debt relief options are focused on reducing or eliminating debt outside of bankruptcy. So, what does debt relief cover?

These strategies include debt consolidation, debt management plans, and debt settlement. Among these, debt settlement is particularly helpful because it can significantly reduce the amount you owe.

Credit Counseling

A credit counselor works with individuals to help them understand their financial situation and design a viable and realistic repayment plan. It is important to understand that the process typically includes a thorough assessment of the individual's finances, including income, expenses, and debts. It streamlines your expenses so that you have more room to repay your debt and prevent future debt.

Debt Management Plans (DMPs)

Debt management plan is often a service offered by credit counseling agencies. In a DMP, the counselor negotiates with creditors to reduce interest rates, waive fees, and consolidate payments into a single monthly payment. You still repay the full amount of debt, only on better terms and without the penalties that might have accrued in the past.

Credit counselors often negotiate lower interest rates and waived fees with creditors to make it easier to pay off debt. DMPs typically take 3 to 5 years to complete, with a structured plan to pay off debts within this timeframe.

Debt consolidation

Part of debt relief is also debt consolidation. Debt consolidation is a financial strategy that rolls multiple debts into a single loan or credit line, often with a lower interest rate. Debt consolidation loans simplify debt repayment as they reduce the number of monthly payments and can lower overall interest costs. Choosing the debt consolidation process means you still have to repay the full amount of your loans, only on more favorable terms.

Among of the pros of consolidation is that it provides a clear repayment timeline, which can help you stay on track and avoid missing your personal loans payments.

Debt Settlement

Debt settlement plan involves negotiating with creditors to pay an amount that is less than the total amount owed. This process involves working with a debt settlement company, which will negotiate on your behalf. You want the financial knowledge and expertise of debt settlement companies, as their specialists have handled debt settlement for thousands of Americans and they know the process and how to help you reduce your debt to a manageable amount.

If you have unmanageable debt, debt settlement is a good alternative to bankruptcy because it affects your credit score less and doesn’t carry the stigma of bankruptcy.

Debt settlement, when done by professionals, can lead to a considerable reduction in the overall debt, sometimes by as much as 50%. The way debt settlement works is that you start making payments into a dedicated savings account.

Once money has accumulated into this account, the debt settlement professionals negotiate on your behalf with your debt collectors to reduce your overall amount of debt. Most creditors may agree to debt settlement because getting less money is always better than getting no money at all.

Once your creditors have agreed to debt settlement, the money in your dedicated savings account is released to pay your creditors. Once payment has been made, you are debt-free. It can take a little time for your credit score to recover but if you remain financially responsible, your credit history can bounce back.

Bankruptcy

Bankruptcy is a legal process that provides a fresh start for individuals unable to repay their debts. The two most common types of personal bankruptcy are Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, or liquidation bankruptcy, involves selling non-exempt assets to pay off creditors. Most types of unsecured debt, such as credit card debt and medical bills, can be discharged.

This type of bankruptcy process typically takes a few months and an automatic stay prevents creditors from collecting during the bankruptcy process.

Chapter 7 bankruptcy remains on credit reports for ten years which can negatively impact your credit scores. It also means that it will be difficult in the future to get a mortgage or car loan.

There are eligibility requirements to qualify for Chapter 7 and eligibility is determined by a means test.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, or reorganization bankruptcy, involves creating a repayment plan to pay off debts over three to five years. Not all debts get repaid: some creditors get repaid in full, others only in part, and some not at all.

Chapter 13 bankruptcy offers a repayment plan usually extending to five years and the money you pay every month goes to a trustee who is responsible for repaying your creditors until the debt has been repaid in full. The bankruptcy court where you filed for Chapter 13 decides which creditor gets repaid and how much they each get. Your payments follow the court’s decision.

With Chapter 13, individuals can keep their assets while repaying debts over time. Debts are reorganized into a manageable payment plan but Chapter 13 bankruptcy can remain on credit reports for seven years which affects your credit scores. There are also debt limits for Chapter 13, which can disqualify some individuals.

Bankruptcy or Debt Settlement?

If you are not certain whether debt settlement or bankruptcy will work best for your case, here is a brief overview of the pros and cons of each solution.

Overview of Debt Relief and Bankruptcy

Debt settlement is best if…

If you have a regular income that covers your living expenses and can repay your settled remaining debt, then debt settlement may be the best course of action because your credit score takes a lesser hit and you can quickly recover from it.

If you keep to financial discipline, then you can repay your debt and successfully negotiate for debt settlement.

Also, if you have a property that you don’t want to see getting liquidated, debt settlement may be the best choice for you because it doesn’t affect your assets.

Debt settlement is a preferable option for those looking to minimize long-term damage to their credit and avoid the stigma of bankruptcy. Debt settlement can provide significant savings on the total debt without the severe credit repercussions and public record that accompany bankruptcy. Also, debt settlement helps individuals maintain greater control over their assets and financial future.

Bankruptcy is best if…

If you don’t have a stable income and your debts are piling up beyond manageable levels, filing for bankruptcy may be the best solution for you.

If you have already worked through a debt relief program and still haven’t managed to re-balance your finances, you may be better off with bankruptcy filing.

Contact a Reputable and Trusted Debt Relief Company

Do you need help right now on what form of debt relief or bankruptcy best suits your financial needs? If you are considering debt settlement vs. bankruptcy the best process is to hire a debt expert. Our certified debt specialists can evaluate your finances and find the best debt solution for you. We are trusted, reputable and professional and have the know-how to help you gain financial freedom and escape from your debt trap.

Contact a ClearOne Certified Debt Specialist at 866-481-1597 today to discuss your situation, explore your best debt relief options, and get a free savings estimate!

The information provided is for informational purposes only and is not intended to provide financial advice. ClearOne Advantage does not provide financial or legal advice. Please consult a certified financial advisor for individual financial needs.