Posted: Jordan Gundersen | July 22, 2016

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Debt Relief Or Bankruptcy?

As a nation, the total outstanding consumer debt is $3.4 trillion. Whether from an illness, overspending, medical emergency, or unemployment, debt is never a fun situation to be in. People struggling financially can choose a variety of ways to help eliminate their debt amount. Filing for bankruptcy and entering a debt relief program are two commonly chosen options.

Debt Relief

People having trouble paying the bills should talk with their creditors to see if they are willing to negotiate a payment plan. Credit counseling services can act as a great resource, help consumers improve their spending habits, and can get borrowers back on track to pay off the debt.

Pros:
Debt relief, like debt consolidation and debt settlement programs, can better protect one's reputation and credit score. Debt relief programs can provide simple ways to save money and pay back the debt with a lower interest rate and monthly payment. Debt relief programs are often not a matter of public record.

Some nonprofit agencies charge very little for reputable and credible services. In fact, a lot of debt relief companies offer a free, no-obligation consultation with a certified counselor to go over one's potential options.

Cons:
People need to watch out for hidden fees when it comes to debt relief programs. With additional fees, these programs could end up costing customers more money. Extending a repayment term could rack up interest rate costs.

Tax liability could also be an issue. The IRS may consider money saved from a debt relief program income. Also, some programs require collateral, and people who default on loan payments could lose their property.

Who Should Choose Debt Relief?
Debt relief programs are ideal for people starting to feel a little overwhelmed financially, and would like help getting back on track. They help people aiming to consolidate, settle, or resolve debt quickly, usually in just a few years. Debt relief programs are great for people wanting to decrease their interest rate and overall monthly payments.

Bankruptcy

People should be cautious when filing for bankruptcy. It can have truly unfavorable consequences, and negative impacts on one's credit history. In fact, bankruptcy information stays on one's credit report for 10 years and can affect one's employment, living situation, and ability to get credit. Bankruptcy can also be expensive in attorney fees.

Pros:
Bankruptcy can erase unsecured debt and stop foreclosures, repossessions, and debt collections. With bankruptcy, most people have to give up their assets; however, there are some exceptions to this rule, varying by state.

Bankruptcy acts as a fresh start. It can protect one from creditors and collection activity with an automatic stay.

Cons:
Bankruptcy is a matter of public record, and filing fees are several hundred dollars. Not only that, but mandatory credit counseling from a government-approved agency is required six months before filing.

Who Should Choose Bankruptcy?
Bankruptcy should be used as a last resort, and only in a time of strong financial danger. If one is severely overwhelmed, having trouble making their minimum monthly payments, paying for everything with their credit card, and is constantly harassed by bill collectors, bankruptcy may be the ideal solution. This is a path for people to explore when they owe more than they can pay.

 

Sources:
http://www.valuepenguin.com/average-credit-card-debt
http://www.nolo.com/legal-encyclopedia/debt-consolidation-v-bankruptcy.html
https://www.consumer.ftc.gov/articles/0084-debt-relief-or-bankruptcy
https://www.legalzoom.com/articles/bankruptcy-basics-when-should-you-throw-in-the-towel

 

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Written by Jordan Gundersen

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