Sometimes debts build up over time until one day when you look at your bills you have to look again because an unexpected red flag has just gone up. Overwhelming debt can also follow a car accident, job loss or other unanticipated crisis. Your natural reaction may be to work out a strict budget and immediately cut back on spending. While this is preferable to rushing out and getting a high-interest payday loan, a tight budget will not provide immediate relief. In fact, it may only slow your sinking.
1. Debt management plans
This process involves a credit counselor who will negotiate lower interest rates with your creditors - mostly credit card companies. You will pay one monthly amount to the counseling company who will distribute it to the different creditors. While you complete the payment plan, you will be unable to use credit cards.
2. Debt settlement plans
This option can potentially ruin any chances you still have of getting back on track. Businesses will offer to get you out of debt by collecting your money, and then holding back on paying your creditors in the hope that their desperation will lead to lower settlement amounts. In the meantime, you will be fair game to debt collectors, and you may even have your wages garnished, your house foreclosed on or other creditors' actions. Scammers are prevalent in this business; you may end up without your money and with none of your debts settled.
The mention of this as a third option is with good reason. Although personal bankruptcy is the better option in most cases, filing for bankruptcy is often done as a last resort. Even if you feel that filing for bankruptcy is a sign of failure, a positive step may be to discuss your dilemma with an experienced bankruptcy attorney who can explain the pros and cons of the different chapters under the U.S. Bankruptcy Code. Personal bankruptcy is the only option that will discharge your unsecured debts - such as credit cards, medical bills and personal loans.
A lawyer will guide you through the means test to determine for which chapter you qualify. The quickest remedy is Chapter 7 bankruptcy, or liquidation bankruptcy. Some of your assets may be sold to pay creditors, but, through debt discharge, within months, you can be debt free.
If you are a wage earner who just needs some extra time to pay your debts, Chapter 13 is the appropriate option. You will have to draft a repayment plan to settle your debts over three to five years for the approval of the court. If you can stick to that plan for the duration of the period, the court may discharge any remaining debt at the end of the bankruptcy period.
Why is bankruptcy the better option?
When you choose debt management, debt settlement or even a self-drafted budget, you have no protection against creditors who start legal action against you. In contrast, as soon as you file for bankruptcy, an automatic stay becomes effective that puts an immediate stop to debt collection efforts. It may even delay foreclosure action.
It is true that bankruptcy can adversely affect your credit score for several years, but so can the other options. In fact, during the time that you spend trying out all the other remedies, a vicious spiral of ever-increasing debt may pull you in, and you may still end up in bankruptcy in the end. Therefore, considering personal bankruptcy as a first option may be the wisest move you can make. With the assistance and advice of a seasoned bankruptcy attorney your chance of regaining financial security increases exponentially.