Sometimes people consider bankruptcy and debt relief as either-or options, but it is more accurate to consider debt relief as a spectrum. Simpler options are at one end of this spectrum, and the more formal procedure of bankruptcy is at the other end.
If you are struggling with debt, you must carefully consider which debt relief option is best for you. In this article, we consider the most common forms of debt relief, including bankruptcy, the advantages and disadvantages of each option, and factors to consider when choosing bankruptcy.
To find out if bankruptcy is the appropriate form of debt relief for you, call Stone Rose Law at (480) 739-2448.
As mentioned above, bankruptcy is a form of debt relief, but it differs from other debt relief options in some key ways. The most crucial distinction is that, unlike the other debt relief choices, bankruptcy involves a legal process that involves a federal bankruptcy court applying the provisions of the United States Bankruptcy Code.
Another important difference between other debt relief choices that rely on persuading your creditors to work with you is that under bankruptcy, you can effectively force your creditors to accept either discharge of your debts or to work with you in a court-supervised debt repayment plan.
Bankruptcy is often a choice a debtor will resort to when other avenues of debt relief are impractical. This can happen when:
When your creditors have already sent you to collections, are constantly calling you demanding repayment, or are in the process of taking legal action to have your wages garnished or your property repossessed, bankruptcy may become your best remaining debt relief option.
The two types of bankruptcy that individual debtors rely on most are Chapter 7 and Chapter 13.
Under a Chapter 7 bankruptcy, the bankruptcy court will eliminate or “discharge” your eligible debts. In exchange, you may have to relinquish some of your property and assets to be sold or ‘liquidated” by a court-appointed trustee. This is why Chapter 7 bankruptcy is also known as liquidation bankruptcy.
Proceeds from these sales will then be distributed to repay creditors as partial satisfaction of what they are owed.
Chapter 7 bankruptcy usually takes from four to six months to complete. Although it may not discharge all your debts, in most cases it will eliminate enough of them to give you a fresh financial start.
Under Chapter 13, you will participate in a debt repayment plan instead of the bankruptcy court eliminating all your debts by discharging them. This plan takes about three to five years to complete. Through it, you will make monthly payments to your Trustee, who will disburse payments to your creditors. You may or may not repay some of your debts in full. How much is paid depends on many factors, such as the type of debts you owe, your total income, your monthly expenses, and the amount of unprotected assets you own.
If you successfully adhere to your payment plan, most or some unsecured debts will be discharged at the end of the plan.
Some important considerations in choosing between Chapter 7 and Chapter 13 are:
If your debt situation is already so serious that other debt relief programs and strategies do not seem workable, then before you decide immediately on bankruptcy, consider the following factors.
What follows are some of the most common debt relief strategies, methods, and services, from the simplest to the more complex options.
A frequent way people get into trouble financially is when they have little or no true idea of how much they are spending and what they are spending it on compared to how much they are making. Couple this with getting involved in too many “Buy now, pay later” monthly payment arrangements, and eventually, they start drowning in debt.
Budgeting is something almost everyone is familiar with in general, but many people do not practice. Taken seriously, though, budgeting can be a key debt relief mechanism even if you are late getting into it, and know you are in financial trouble.
Budgeting can be as simple as a handwritten ledger breaking down your income and expenses by category.
Or, if you have a computer, even a free spreadsheet application can give you a way to do the same thing.
Some paid software budgeting applications can give you more advanced features, including reporting functions and methods like the debt snowball method to give you a deeper insight into what you can do to restore balance.
Budgeting may be the simplest yet most effective way to start getting out of a bad debt situation. It should be the cornerstone of every other debt relief strategy or method you may use and a good habit to make into a lifelong one.
Pros of budgeting:
Cons of budgeting:
If cutting back on expenses through a budget is not enough to get control over your monthly payments, another option is a debt consolidation loan or to seek refinancing on an existing loan.
Debt consolidation and refinancing are often effective if you have high-interest debt, like credit card debt payments. You can often pay off these high-interest debts with a new loan with a lower monthly payment at a reduced interest rate.
Pros of debt consolidation and refinancing:
Cons of debt consolidation and refinancing:
Debt settlement consists of you offering to pay a creditor a lump sum amount that is less than the total amount you owe, with the implication being that if the creditor does not accept the offer, it might not receive anything more because you will declare bankruptcy.
You can negotiate a debt settlement directly with a creditor, or you can engage the services of a debt settlement company. A debt settlement company’s program will often have you pay money you would otherwise allocate to pay the subject debt into an escrow account instead, from which it will make an offer to the creditor to settle your debt.
Debt settlement is usually a strategy debtors try if they are already behind on overwhelming debt payments, and the creditor believes it may not receive anything more. If you are not behind in making your payments, most creditors will be unlikely to consider debt settlement as an option.
Pros of debt settlement:
Cons of debt settlement:
If you choose credit counseling as a debt relief option, a certified credit counselor will negotiate with your creditors and create a debt management plan for you. This plan will usually feature a single payment to the credit counseling agency, from which it will pay creditors.
Credit counseling involves more than just offering creditors the equivalent of debt consolidation or refinancing. Your credit counselor will help you review your budget, spending habits, credit, and debt levels to look for ways to help you better manage debt, avoid financial emergencies, and rebuild your credit.
A credit counseling debt management plan usually takes three to five years to complete. It is an appropriate choice if you have large debts.
Pros of a debt management plan:
Cons of a debt management plan:
Which debt relief choice is right for you depends on several underlying circumstances, including:
The table below identifies some financial hardship factors you will want to consider carefully when deciding whether to try debt relief programs short of bankruptcy, or if bankruptcy is a good first choice.
| Consideration | Debt Relief | Bankruptcy |
| You do not owe a lot of money, have some disposable steady income, and are confident you can adhere to a voluntary payment plan. | Budgeting, debt consolidation, and refinancing are good choices to consider. | Chapter 13 is an option, but check other debt relief choices first. |
| You have heavy debts and you are struggling to make minimum payments. | Credit counseling and a debt management plan or a debt settlement offer are possible options. | Chapter 7 can eliminate large debts that you have little prospect of repaying.Chapter 13 can make your payments more manageable under a debt repayment plan. |
| You want to protect your credit rating as much as possible. | Debt relief options short of bankruptcy will often not damage your credit rating as much as bankruptcy will. | A bankruptcy will stay on your credit record for at least seven years (Chapter 13) or 10 years (Chapter 7). |
| Creditors are already sending you to collections, threatening repossession or foreclosure, or are taking legal action against you. | It may be too late for non-bankruptcy options other than a debt settlement offer to work. | The bankruptcy automatic stay will keep your creditors at bay, suspend legal actions against you, and in a Chapter 13 can help you to keep property that you may otherwise lose to repossession or foreclosure. |
| You want to have a fresh financial start as soon as possible. | A debt settlement offer, if the creditor accepts it, will quickly eliminate the debt but can leave you vulnerable to being taxed on forgiven amounts more than $600. | Chapter 7 bankruptcy will eliminate most if not all debts within four to six months in most cases. |
| You have a high income that is steady. | Budgeting, debt consolidation or refinancing, or a credit counseling debt repayment plan are options to weigh. | Chapter 7 may not be available if you do not qualify under the means test. |
| Your income fluctuates considerably from month to month. | Depending on how much you owe, debt relief options short of bankruptcy may not be practical if you cannot reliably make minimum monthly payments. | Chapter 7 may be better than Chapter 13, because you still need to make consistent monthly payments under a debt repayment plan. |
Here are some of the factors to weigh when you are deciding whether to try non-bankruptcy debt relief options.
It should be clear by now that no one debt relief strategy is the best in all cases. Budgeting is important no matter which option you choose, but beyond that, your best choice is one that is highly dependent on your unique financial facts.
At Stone Rose Law, our experienced bankruptcy attorneys can give you the guidance you need to help you make the right choice for you to get out from under crippling debt.
In a free consultation, we can review your current financial and debt situation, discuss your debt relief options and their possible legal implications, and provide you with resources to assist you in deciding whether bankruptcy and debt settlement are your best choices or if other paths, like a debt consolidation loan, refinancing, or credit counseling, are more appropriate.
To speak with an experienced Arizona bankruptcy attorney, call us at (480) 739-2448 to ask a question or schedule a free initial consultation.
