Debt Relief vs. Bankruptcy: Which One is the Better Option?

debt relief vs bankruptcy

If you are struggling to handle your debts, you may have looked into some of your options. In that case, you have probably found two main ways to resolve debts: filing for bankruptcy and pursuing debt relief. You may be wondering which is the right option for you. In that case, keep reading. We’ve taken a closer look at debt relief vs. bankruptcy to help you decide which option to pursue.

What does it mean to file for bankruptcy?

At its core, bankruptcy is a legal proceeding where the judge evaluates a person’s assets who believes they are unable to pay their debts. During the proceedings, the judge comes up with a method to repay the individual’s creditors and resolve their debts.

Keep in mind that there are two common forms of bankruptcy, and it’s important to understand the differences between them.

Chapter 7 bankruptcy

Chapter 7 bankruptcy is also known as “liquidation bankruptcy.” In this scenario, the judge appoints a trustee to oversee your case. The trustee will then be in charge of liquidating any non-exempt assets that you currently own, if you have any, and using that money to pay your creditors. Once the liquidation has taken place and the funds have been distributed, the rest of your debt will be discharged, which means you won’t have to worry about paying it anymore. 

However, while this may seem like an easy solution, remember that it does severely harm your credit and that it stays on your credit report for a total of 10 years. Plus, there are many alternatives to bankruptcy out there for you to choose from.

Chapter 13 bankruptcy

In contrast, Chapter 13 bankruptcy is sometimes known as “reorganization bankruptcy.” With Chapter 13 Bankruptcy, you’ll undertake a court-approved payment plan to repay your creditors in 3-5 years. At the end of the repayment period, your remaining dead will be discharged.

As long as you stick to the payment plan, you may get to keep your assets, like your home and cars. However, if you have a track record of missing payments, the court reserves the right to change your filing to a Chapter 7 bankruptcy and liquidate your assets.

Chapter 13 Bankruptcy will still damage your credit; however, it won’t be as severe as filing for Chapter 7. A Chapter 13 Bankruptcy stays on your credit report for a total of seven years.

What are my debt relief options?

That said, going through with bankruptcy is not the right option for everyone. For others, there are debt relief options. While debt relief is a broad term, they’re typically two options to choose from. You can either choose a debt management plan or opt for a debt settlement program. We’ve outlined the specifics for you below.

Debt management plan

In a debt management plan, a financial counselor will help you set up a voluntary agreement for repayment between you and your creditors. Then, you will be responsible for making one lump sum payment each month. Next, you pay the credit counselor, who will then distribute the proceeds to the appropriate creditors.

Be aware that credit counseling agencies can sometimes be a breeding ground for scams. You shouldn’t have to pay high fees to receive a debt management plan. If it is at all possible, make sure to choose a nonprofit agency, such as the National Foundation for Credit Counseling (NFCC).

Debt settlement

If you feel like you can’t afford to pay back the entirety of what you owe, it may be time to consider debt settlement. As the name suggests, debt settlement is a method of settling your debts  by  agreeing to pay a portion of them in a lump sum. In exchange for that  lump sum payment, your creditors agreed to forgive the remainder of what they’re owed.

Typically, reaching a debt settlement is best done with an attorney, who can help you decide how much to offer to pay and walk you through the process to help ensure that everything is done right and you are protected. If you’re thinking of going this route, reach out to tame Law Group today for a free consultation.

Is debt relief better than bankruptcy?

Debt relief is not necessarily better than bankruptcy. However, it is the less drastic option. While  asking for a debt management plan or reaching a debt settlement will likely harm your credit, the impact will be less than if you filed from either form of bankruptcy. For example, some estimates say that a debt settlement could bring down your score by 100-125 points if you have stellar credit.

In general, if you think you can afford to repay  your debts, debt relief is often the more sensible option. As a rule of thumb, if your total debt payments make up less than 50% of your take-home pay, it’s a good idea to explore debt relief. However, if they are larger than that, you may be better suited looking into bankruptcy.

Should I file for bankruptcy or debt relief?

The decision of whether to file for bankruptcy or to pursue debt relief options is a personal one. After all, it will depend on the specifics of your financial situation and  your total debts. That said, this is not a situation where you’ll want to go it alone. When in doubt, it’s a good idea to reach out to financial experts who can help you make the decision that works best for you.

If you’re considering debt settlement as a debt relief option, Tayne Law Group is here to help. Contact Tayne Law today via our online contact form or call (866) 890-7337 for a free phone consultation.

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