Debt has become a way of life for many people. A home loan, a car loan and other unsecured debts are common and necessary in some cases. However, there comes a point when the debt becomes out of control, and this needs to be addressed as swiftly as possible.
Consumers have several options when it comes to eliminating or reducing their debt. While attempting to repay the money without professional help is possible, if a person gets behind on payments or can’t keep balances below the maximum limit, the fees and charges can quickly move a person even further into debt. Consumers who need a way out often consider the following two options: bankruptcy and debt settlement. Each has its pros and cons and there is no one right decision for every person.
In the United States, consumers have two options when in comes to bankruptcy. Chapter 7 bankruptcy works for individuals who have no way to repay the money they owe. When their income is compared with their debts and liabilities, repayment seems impossible. After filing, it is possible to have a large portion of the debt dissolved, leaving the person free from debt. The process does impact a person’s credit score and can make it difficult to secure credit in the future.
Chapter 13 bankruptcy is comparable to debt settlement since they both work in much the same way. In this situation, a consumer files through the courts, and while some of the debt is reduced, a repayment plan is constructed to ensure that all of the funds are paid back over the course of three to five years. As soon as a person files, he or she receives protection from creditors. The phone calls immediately stop, and the creditors must go through the courts to try and regain their money.
The downside of bankruptcy is often the stringent debt repayment plan. In order to make the payments on schedule, a debtor is often left with just enough money to get by on while the rest goes to the creditors. It can be difficult for people to live up to the expectations of the plan, and if they default at any point, the entire process may be dissolved. This results in a negative mark on the person’s credit score, showing that they tried to file for bankruptcy and defaulted on the repayment plan. This is a common occurrence and can leave people in worse financial shape than when they started.
With debt settlement, a company works with creditors to reduce the balance a person owes and work out a repayment plan. The plan is usually more flexible than those offered by the courts. But it must be paid back on time, and payments cannot be missed or the entire solution can fall apart. Negotiations are handled by the debt settlement company, and it is possible to pay back less money that what is actually owed. While this will affect a person’s credit, it tends to be less damaging than filing for bankruptcy.
While debt settlement has many benefits, there are some problems that people may face along the way. The most important thing to consider is the cost. Working with a debt settlement company can be expensive. While less debt needs to be paid back, the cost for the service tends to increase the monthly payments. Also, the borrower is not protected in any way by the court system, so creditors can continue to call and attempt to get their money back unless they sign an agreement not to do so.
When attempting to choose between bankruptcy and debt settlement, it helps to use a debt calculator to total the amount owed. Then, after speaking with a financial advisor, a person can determine whether bankruptcy or debt settlement is the more fiscally sound option. Because each situation is different, it is up to the consumer to make the final decision based on his or her finances.
Andrea Haines writes regularly for a wide range of finance and technology websites. Over the course of her career, Andrea has contributed to a wide range of in-house and national magazines on subjects as diverse as music, gadgets and mobile phones together with her main focus which is the finance sector.