Bankruptcy Debt Relief Options

Debt Relief?  Debt Consolidation? Credit Counseling? Or Bankruptcy?  How can you best reduce your minimum payments on credit cards and other obligations?  This page attempts to explain why in many cases, debt relief through bankruptcy--particularly Chapter 13--can accomplish the same thing as a debt consolidation program for less cost.

One of the choices faced by many consumers seeking debt relief is whether to seek credit counseling, use a debt consolidation company to help lower their payments, or to file bankruptcy.   Most people choose bankruptcy as their last resort after pumping money into debt relief programs that don't deliver, for various reasons. 

Debt Consolidation:  There is nothing inherently wrong with debt consolidation or debt relief programs.   The basic concept is that all your unsecured debts are gathered together and then you make one payment, presumably at a negotiated lower rate with some reduction in the interest that accrues.  There are many problems with this setup, however.    It will have a negative impact on your credit record and in many cases, the amount and length of the repayment is significantly higher and longer than it would be in a bankruptcy case;

Debt Settlement:  Debt negotiation or settlement "specialists" are even more problematic.   I hear horror stories all the time from clients who have paid thousands of dollars to these organizations who are supposed to accumulate a lump sum large enough to make settlement offers to the creditors.   They advise debtors to stop paying their debts, and instead to send in the monthly payments to them for a long period of time until sufficient money is built up to make offers to the creditors.   What's the catch here?  There are many.  For one, the creditors are under no obligation to settle.   The negotiation company gets paid up front (it seems) and often times the debtor ends up paying a lot of money to have their credit ruined without resolving any (or all) of their debts.

This is not to say that there aren't times when investigating the above options aren't warranted.   But it is important to at least equally consider options under bankruptcy.

In Chapter 7 one can usually eliminate the majority, if not all, unsecured debts without doing any repayment.  This is obviously the best solution if one is eligible for Chapter 7.  This usually means having no surplus income or ability to make any payments to unsecured creditors, or having more assets than can be protected by applicable exemptions.

Why Chapter 13 May Be a Better Choice for You:

Chapter 13 is actually like a turbo-charged consolidation program.  It enables you to keep all your assets, and repay some portion of your unsecured debts over 36-60 months, at the end of which time you are discharged from any remaining debts.  One of the many advantages of Chapter 13 is that interest is not added to your debts (at least not to those which are dischargeable---debts for certain taxes and student loans, for example, will continue to accrue interest).    After analyzing these situations for almost 20 years now, I can tell you that clients who don't qualify for Chapter 7, but are having a hard (if not impossible) time making the required minimum payments on their credit cards, can do a repayment plan in a Chapter 13 that is affordable, less than they would get outside of bankruptcy, and guaranteed to be completed within 36-60 months (the time period depends on a number of factors, and must be analyzed at the time you are ready to proceed by a qualified bankruptcy attorney).

 There are many other advantages that Chapter 13 bankruptcy has over other debt relief options, but it is important to have a consultation with a bankruptcy attorney when you are considering your alternatives.   See my blog article on this topic for more information.