Financial Freedom Without Bankruptcy: Exploring Your Options
It is easy to accumulate debt. Paying it off is another story. The average American has $21,800 in debt. This may seem like a lot of money, but it is actually $8,000 lower than the average debt in 2019. So, we are making some progress.
Still, finances are a major struggle for many people. Some spend more than they earn, causing them to dig deeper into debt. After a period, they drown, with no means of escape.
Many people consider bankruptcy, but it comes with a huge cost. Bankruptcy can wipe out debt and provide you with a fresh start, but it will damage your credit for a long time. It will be hard for you to take out a loan or even get a credit card.
Therefore, bankruptcy should only be considered as a last resort. Before you choose this option, consider all of your options.
Credit Counseling
Once your debt starts spiraling out of control, take action by contacting a certified nonprofit credit counseling agency. These organizations can review your income, debts, and other expenses and help you devise a budget. With the right advice and coaching, you may be able to take control of your debts and avoid bankruptcy. In some cases, credit counselors may be able to work with creditors to help lower your payments.
Debt Consolidation
If you have good credit and have not yet missed any payments, you may want to consider debt consolidation. This allows you to move the balances of high-interest credit cards to a loan with lower interest rates and a fixed monthly payment. You could take out a personal loan or borrow against your home equity and use the proceeds to pay down your debt. You may also qualify for a balance transfer credit card with a 0% introductory interest rate.
Debt Management Plan
A debt management plan is a repayment program organized by a certified credit counselor. The counselor will work with you to review your finances and determine a realistic amount you can afford to repay your debts each month. The counselor will negotiate with your creditors to resolve debts within three to five years. The credit counseling agency typically tells your creditors you are facing bankruptcy, so they are more likely to agree to a debt management plan. Even the best debt management plan can affect your credit if payments are late or partially made.
Debt Settlement
Debt settlement companies claim they can lower your debt burden by negotiating with creditors on your behalf. They gain leverage over your creditors by helping you save up for a partial repayment. They tell you to stop making your monthly debt payments and deposit the money into a special savings account. Once you save up enough, they will use this money to repay creditors.
Beware of the Negative Aspects to Debt Settlement
Debt settlement plans could negatively impact your credit much like bankruptcy. Meaning they can have a significant impact on your credit score. While debt settlement can help you reduce the total amount you owe to your creditors, it is a process that often involves late payments and negotiating with creditors to accept a reduced lump-sum payment, which means you’ll be settling your debts for less than the full amount you owe.
Chapter 7
If you are in a rough financial situation, you may be considering bankruptcy.
Chapter 7 bankruptcy offers several benefits over alternative debt relief options, which is why it is a popular choice for individuals seeking a fresh start from overwhelming debt. Some of the benefits of Chapter 7 bankruptcy include:
- Total Debt Discharge: In a Chapter 7 bankruptcy, many types of unsecured debts can be completely discharged (wiped out), providing you with a clean slate. This includes credit card debt, medical bills, personal loans, and more. You won’t have to pay them back.
- Speed: Chapter 7 bankruptcy is typically a quicker process than alternatives like Chapter 13 bankruptcy or debt consolidation. It can be completed in a matter of months, allowing you to move on with your financial life sooner.
- Fresh Start: Chapter 7 bankruptcy provides you with a fresh financial start. You can begin rebuilding your credit and finances without the burden of unmanageable debt.
- No Repayment Plan: Unlike Chapter 13 bankruptcy, which involves a repayment plan that lasts several years, Chapter 7 does not require you to make ongoing payments to creditors.
- Protection from Creditors: When you file for Chapter 7 bankruptcy, an automatic stay goes into effect, which prohibits creditors from taking any further collection actions, including lawsuits, wage garnishments, and harassing phone calls.
- No Income Requirement: Chapter 7 bankruptcy does not require a specific income level or a repayment plan, making it accessible to individuals with various income levels.
- Exemptions: In Chapter 7, you can typically keep certain essential assets and property, thanks to bankruptcy exemptions. This means you won’t lose everything you own in the process.
- Simplicity: The Chapter 7 process is generally more straightforward compared to other bankruptcy options, which can involve complex repayment plans and negotiations.
However, it’s essential to be aware of the potential downsides and eligibility requirements associated with Chapter 7 bankruptcy, including income limitations and the liquidation of non-exempt assets. Additionally, Chapter 7 bankruptcy will remain on your credit report for ten years, which can affect your ability to obtain credit in the short term.
Summary
The decision to file for Chapter 7 bankruptcy should be made after careful consideration and consultation with a good bankruptcy attorney who can assess your specific financial situation and help you determine whether it’s the best option for your needs. In some cases, alternative debt relief solutions may be more suitable, so it’s important to explore all available options before deciding.