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Bankruptcy and Debt Relief

Elizabeth Johnson

Financial Advisor
Updated: 01/2019

Bankruptcy and Debt Relief

There are several different debt relief options available to consumers who are having a hard time paying their bills. However, there are some situations where there’s almost no way that you’ll ever be able to get current on your obligations. However, that doesn’t mean that there isn’t a solution. The process of bankruptcy is the ultimate form of last-resort debt relief. However, before you declare bankruptcy you should be aware of what it entails and how it works.

What is Bankruptcy?

Bankruptcy is a government-enforced process that allows you to discharge your debts. It’s important to note that bankruptcy should be the option you turn to when there is no other option, as the consequences of declaring bankruptcy can be quite severe.

When you enter into bankruptcy proceedings you are protected from attempts to collect on your debts. That means that debt collection letters and phone calls stop. Moreover, your debts are discharged for a fraction of what you owe. As a result, bankruptcy can be an excellent option for consumers who have no where else to go.

How Does Bankruptcy Work?

Bankruptcy works by shielding you from efforts to collect on debts. It starts a negotiated process whereby your available assets are distributed to your creditors. In turn, your creditors cannot attempt to collect on your debts ever again, as they are considered discharged.

In order to enter into bankruptcy proceedings, you’ll most likely want to hire a lawyer. Bankruptcy laws are some of the most complex in the country, and having a legal expert who understands and is familiar with the process is an essential part of getting the best possible results from the process.

Bankruptcy and Debt Relief

What are the Benefits of Bankruptcy?

The primary benefit of bankruptcy is that you are protected from efforts to collect on your outstanding debts. Creditors cannot try to collect on debts while you are in the bankruptcy process. Moreover, once the process is completed, the debts that you had are considered discharged, so your current creditors, and any other company that buys your debt in the future, cannot legally try to get you to pay on it.

Additionally, bankruptcy gives you something like a clean slate when it comes to your finances. This can be a great chance for many consumers to start over again and avoid the decisions and habits that lead them into debt in the first place. Therefore, if done correctly and thoughtfully, bankruptcy can be an excellent tool to obtain debt relief.

Are there Different Types of Bankruptcy?

Yes, there are two major types of bankruptcy proceedings for individuals. Chapter 13 bankruptcy is more of a restructuring of your debts. Chapter 7 bankruptcy discharges your debts. Chapter 13 bankruptcy does not have as many drawbacks as Chapter 7 does in terms of the way your credit report and credit history are affected. However, you will still have debt obligations after a Chapter 13 bankruptcy, as your debts are merely restructured. This means that the interest rates, payments, and balance are altered according to a negotiated agreement with your creditors.

What are the Drawbacks of Bankruptcy?

There are several drawbacks for bankruptcy, which is why it should only be considered as a last resort. First, your credit score will take a huge hit. It will be difficult or impossible to obtain loans and lines of credit at a reasonable and affordable interest rate while your bankruptcy is on your credit report. The bankruptcy will stay on your credit report for 7-10 years, depending on the type of bankruptcy you declare. Chapter 13 bankruptcies stay for 7 years, and Chapter 7 bankruptcies stay on your credit history for 10 years.

Additionally, there are several types of debt that cannot be discharged in bankruptcy. These include child support, alimony, tax debt, and others. It is important to talk to a qualified bankruptcy lawyer to get a better understanding of how bankruptcy interacts with your particular debt obligations.

Are There Debt Relief Alternatives to Bankruptcy?

There are many different strategies for dealing with debt besides declaring bankruptcy. Some of the most common and effective strategies are credit counseling, debt settlement, and consolidation loans.

Credit Counseling

Credit counseling is an educational process to help you understand how debt and credit work. The goal of credit counseling is for you to take your newfound understanding and use it to make wise financial decisions. Credit counseling can help you understand other debt relief options. Moreover, many companies are willing to renegotiate the terms of your debts if you complete credit counseling. However, credit counseling does not provide you with any additional money to pay your debts, nor does it lower the overall amount of money that you owe to your creditors.

Debt Settlement

Debt settlement is a process where you offer to pay one lump sum to your creditors in exchange for having your debts discharged. Debt settlement can be attempted with any debt, as it is essentially a business transaction. However, most companies will not be willing to settle debts if they think you’ll eventually be able to pay back the full amount. Therefore, you’ll have to prove that you won’t be able to pay the debt back, and that the money you have for the settlement isn’t available to meet your regular payments.

Debt settlement can also dramatically lower your credit score, as it is reported to the credit monitoring agencies that you did not pay your debts in full. Moreover, companies are under no obligation to settle your debt, and almost all will refuse to do so unless you are very far behind on your payments.

Consolidation Loans

Consolidation loans are one of the best options for consumer debt relief. A consolidation loan is a loan that pays off all of your outstanding debts and consolidates them into one place. The loan usually has much lower interest rates than other types of debt, and so it can reduce your monthly expenses while helping you pay off your debt faster. A consolidation loan doesn’t have the same negative impact on your credit report as other debt relief strategies and bankruptcy do. However, to qualify for a consolidation loan you need to meet certain credit score requirements, so it may not be an option open to everyone.

Elizabeth Johnson

Elizabeth is an expert on Debt Consolidation as she provides helpful advice to people who are dealing with debt problems. She graduated college with a BS in Finance. After college, she took a job working at a non-profit debt counseling program. It was at this position where Elizabeth honed her expertise for helping people understand how different financial products work and finding ways to help people pay off their debts.