When You Should Seek Debt Relief
Consider bankruptcy, debt management or debt settlement when either of these is true:
You have no hope of repaying unsecured debt within five years, even if you take extreme measures to cut spending.
The total of your unpaid unsecured debt equals half or more of your gross income.
On the other hand, if you could potentially repay your unsecured debts within five years consider a do-it-yourself plan. That could include a combination of debt consolidation, appeals to creditors and stricter budgeting.
Major Pros And Cons Of Filing For Bankruptcy
You need to have a minimum amount of income to prove your inability to repay your debt when you file for Chapter 7 bankruptcy.
You surrender nonexempt assets to pay off secured debt. You might even have to yield other property to pay off unsecured debt.
You could assess your eligibility for both Chapter 7 and 13 bankruptcy proceedings by working with a credit counselor to review your options. Consider these pros and cons before you go that route.
|You wont receive a clean slate|
Basic Differences Between Chapter 7 And Chapter 13
Chapter 7 bankruptcy is for financially disadvantaged individuals who cant pay their debts. It is more of a legal debt forgiveness plan.
Certain assets and property could be liquidated to satisfy your creditors, if you have any. I most cases, legal exemptions may allow you to keep some assets.
Outstanding debts in a Chapter 7 filing can be discharged within 5 months.
Chapter 13 bankruptcy is reserved for individuals with more appreciable finances and property. Your bankruptcy administrator assesses your finances and create a debt forgiveness and repayment plan with your creditors.
Depending on your administrators assessment, you could keep your home and some assets. It could take up to 5 years for all of your debts to be discharged after declaring Chapter 13.
Please understand, this is the basic explanation of a bankruptcy filing. It is a legally complicated and emotionally exhausting process. For example, bankruptcy declarations stay on credit histories for a decade.
It is a simple process.
Bankruptcy should only be initiated with the guidance of a legal professional. Dont try it on your own.
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Which Damages Your Credit More
In most cases, filing for bankruptcy will damage your score much more than debt settlement.
A Chapter 7 bankruptcy stays on your credit report for 10 years. Chapter 13 stays on for seven. Filing for either type can also lower your credit score by 150 to 200 points.
Successfully settled debts are marked as settled on your credit report for seven years, but you wont face as many restrictions during that time period when it comes to borrowing. And your credit score may take a dip thats just as bad as filing for bankruptcy.
The danger is when debt settlement isnt successful. If youve stopped making payments on your debt in anticipation of a successful settlement, you risk defaulting on your debts if it doesnt come through. Youll mar your credit report and might be left with no alternative to bankruptcy. Of course, you can continue paying your creditors throughout the settlement process, but most people dont due to the expense.
How Does Debt Settlement Affect My Credit Score
Debt settlement can be harmful to your credit score because the process requires you to stop paying your bills and go delinquent on your debts. Along with the hit to your credit, some creditors may refuse to negotiate with you and could sue you for nonpayment and garnish your wages. For these reasons and others, debt settlement can be risky and is not an ideal option.
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How Does Debt Consolidation Work
Debt consolidation works by combining your existing debts into one new debt, ideally at a lower interest rate. For example, lets say you owe $2,500 on one credit card, $5,000 on another card and $7,500 in other debts. You could get a debt consolidation loan for $15,000. Once you pay your preexisting debts with your new debt consolidation loan, you make a single payment on your new loan each month.
Debt Settlement Vs Bankruptcy Your Credit Report
Filing bankruptcy has an immediate negative impact on your credit report, but may be better for your long-term credit health. Chapter 7 stays on your report for 10 years and Chapter 13 for seven years. Though your credit takes an initial hit, bankruptcy also gives you a fresh start with your debt and finances. So you can improve your score even during this 7-10 year period. With a significant amount of debt discharged, you should be able to make on-time payments for any new debt, which will improve your credit score.
How debt settlement impacts your credit score depends on how the creditor reports it to the credit bureaus. If itâs reported as âpaid in full,â it wonât harm your credit score. If itâs reported as âpartially paidâ or âsettled,â it will harm your credit score. The good news is that the negative impact on your credit report will decrease over time if you continue to pay your other bills on time.
Bankruptcy also provides you with a better credit score long term since several of your debts are completely forgiven and you are freed up to pay future debts. Itâs likely to put you in a better position to receive loans in the future. Thatâs because lenders know you canât file again for eight years. You can do debt settlements as often as lenders agree to them. So if you have a debt settlement on your credit report, lenders may hesitate to give you a loan.
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Beware: Debt Relief Can Make Things Worse
The debt relief industry includes scammers who are eager to take what little money you have. Many people who enter debt relief programs fail to complete them. You could end up with debts that are even bigger than when you started.
But debt relief may give you the new start or the breathing room you need to finally make real progress.
Be sure you understand and verify these points before entering any agreement:
What you need to qualify.
What fees you will pay.
Which creditors are being paid, and how much if your debt is in collections, make sure you understand who owns the debt so payments go to the right agency.
The tax implications.
What Should Your Next Step Be
Everyones debt situation is different, which means every client needs a unique and customized approach. Our counsellors will explore debt relief options with you and provide information so you can confidently tackle your debts in the best possible way. Book your FREE Financial Needs Assessment today!
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The Impact On Your Credit Report
One of the first considerations most consumers make when deciding whether to take advantage of a debt consolidation program or file bankruptcy is the impact on their credit report. As discussed earlier in this article, there are some forms of debt consolidation that will not adversely affect your credit report and may in fact slightly increase your credit score by reducing the number of open accounts you have.
But most individuals in need of debt consolidation will usually not get enough relief by simply consolidating their debt. As a result, if they are seeking debt consolidation they need a form of debt consolidation that also reduces the interest paid on the debt and the amount of debt. This type of debt consolidation, often accomplished through a debt management plan, will adversely affect your credit score at the beginning as your accounts will be closed as part of the plan.
Still filing bankruptcy is a serious decision and should only be taken advantage of by those individuals who simply can no longer afford to pay their bills. While the fact that you filed bankruptcy will be reported on your credit report for up to ten years, most consumers are able to re-establish their credit and even qualify for a new car loan or mortgage within a few years after their bankruptcy is discharged.
Debt Consolidation Vs Bankruptcy: The Difference
Debt consolidation works by combining all of your debts into one monthly payment. It comes with one interest rate and one set of rules. A debt consolidation company will buy your debts for one set amount this is essentially a form of a loan.
Debt consolidation has several advantages.
If large debts are threatening your finances, you may be considering bankruptcy as a means of easing the strain. However, bankruptcy will ruin your credit score and force you to surrender particular possessions. Also, it can restrict your options for jobs, mortgages, and cell phone contracts. Bankruptcy should always be a last resort.
Debt consolidation may allow you to pay off your debt without breaking the bank, which will help you to repair your credit history. Learn more about which debt relief option is right for you today.
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Debt Consolidation Or Bankruptcy Which Is Better
If youve got debt in America, youve got company. A new study reveals that 80.9% of baby boomers, 79.9% of Gen Xers, and 81.5% of millennials are carrying and that can invite chaos into an orderly life.
We might as well run up a red flag and change our name to the United States of Debt!
We all know the drill on how we got here: The company downsizes, the mortgage balloons, the surgery isnt fully covered, tuition soars while the Honda sputters.
The good news is theres plenty of help. There are some well-known methods bankruptcy and some form of debt consolidation that people have used to help themselves eliminate debt, according to Northwestern University marketing professor Blake McShane of the Kellogg School of Management.
His paper in the Journal of Marketing Research identifies the traditional methods that have helped hundreds of thousands of people get debt-free.
Bankruptcy Or Debt Consolidation: How To Decide Which Is Better
When determining whether to choose bankruptcy or debt consolidation, each borrowers individual financial situation will be a dominating consideration. Some of the factors to consider include:
- Individuals with a higher credit score can benefit from more competitive terms on a debt consolidation loan.
- Income predictability: Individuals with unpredictable income and potential for job loss might be better suited to Chapter 7 bankruptcy, if they qualify.
- Amount of debt: Consolidated debt must still be paid back, so if the debt burden is too high, then a Chapter 7 or a Chapter 13 filing might be better options.
- Overall financial health: Debt consolidation works well for those in stable financial situations. But if youre buried in debt and cant find any other reasonable path out, bankruptcy may be an option worth exploring.
Generally speaking, debt consolidation is a preferable option if you can qualify for a lower interest rate than you have currently on your debts, and if you expect your financial situation to improve in the future. If youre not able to pay back your debt consolidation loan, it wont help very much, and could even hurt your credit if you miss payments.
When comparing debt consolidation versus bankruptcy, its also worth noting that these arent your only options for dealing with debt.
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Is Chapter 7 Or Chapter 13 Bankruptcy Better
Chapter 7 bankruptcy is generally better because you can discharge many of your debts without repaying them. But it has limitations. If your income is too high, you might not qualify for Chapter 7 debt relief.
To qualify for Chapter 7 bankruptcy, youâll have to pass a Means Test to see if you can afford to make monthly payments under Chapter 13 bankruptcy or not. In this test, youâll look at your median income from the last six months compared to the median income in your state. Income includes alimony, child support, money from rentals, unemployment, and retirement money. If your income is greater than the median in your state, you may still qualify for Chapter 7 based on your expenses. Upsolve can walk you through these calculations.
Under Chapter 7 you may lose personal items like your home or car and other personal property if the itemsâ combined worth is too much. But this doesnât happen often. Under Chapter 13, you can keep your personal property even if youâre behind on payments by incorporating it into the repayment plan. Also, if you want to purchase a home in the near future, youâll have a longer waiting period following Chapter 7 bankruptcy than Chapter 13.
Since bankruptcy is reported in the public record and on your credit report, you may want to file Chapter 13 if you want to get it removed as soon as possible. Chapter 13 bankruptcy is usually removed from your credit report after seven years, while Chapter 7 stays on for ten years.
Is Debt Consolidation Better Than Bankruptcy If So Why
ByHector Milla | Submitted On June 14, 2010
In the short term bankruptcy is an attractive solution because you can release most of your financial obligations in a fairly short period of time. The harsh reality is that the government can take and auction off your assets or put you on a payment plan to pay back some of your debts. This would depend on what state you live in and whether you file for chapter 7 or chapter 13. If you will have to pay back your obligations, it would be better to do debt consolidation.
When consolidating, you do have to pay back all of your debt but at least you don’t have to worry about anyone taking and selling off your personal belongings. Not only that, you can quickly begin to build up your credit instead of waiting up to ten years for a bankruptcy stain to be removed from your report. Future creditors will value the fact that you are dependable enough to pay back what you owe and are more likely to trust you. There is also the added self-satisfaction of knowing that you are being responsible in honoring your commitments.
It might take some extra time and energy to come up with the money for your consolidation program but when you think about what you can lose in a bankruptcy, the alternative is so much better. It’s worth the sacrifice of coming up with the money to cover your bills. Also, you get credit counseling and the convenience of paying everything in one monthly payment.
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Pro: You Can Hit The Reset Button On Your Repayment
With a Chapter 7 bankruptcy, you could dispose of some or all of your debt.
With a Chapter 13 proceeding, you would establish a three- to five-year repayment plan for your remaining debt. That repayment plan might even give you the convenience of a single monthly payment if youre working with a credit counselor on a debt management plan.
What Are My Debt Consolidation Options
There are a number of debt consolidation solutions for combining your debts that may be available to you. The five most common debt consolidation solutions are:
- Balance transfers are often available, allowing you to combine the balances of multiple credit cards onto one card with a lower interest rate.
- Debt Consolidation Loan. These can be obtained through a bank or a finance company, if you qualify, and can be used to pay off all your credit card debt and unsecured loans. Most people who have multiple credit cards with significant outstanding balances, seek debt consolidation loans to consolidate their credit card debt and pay it all off.
- Debt Consolidation Program. This is an arrangement where a non-profit credit counselling agency works with your creditors to reduce or stop the interest on your debt, and roll all unsecured debts into one easily manageable payment. If you do not qualify for a debt consolidation loan, a debt consolidation program is your next option.
- Home Equity Loan. Often called a second mortgage, this involves leveraging the equity in your home to obtain a loan, using your home as collateral. The loan amount is determined by the value of the home.
- Line of Credit. Obtaining a line of credit involves borrowing from your bank. Lines of credit may be secured by your home, or may be unsecured if you have good credit and a high income.
There are advantages and disadvantages to each option, of course, which well cover in Chapter 4.
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Set Up Automatic Payments
Once you have your debt consolidation loan, see if your lender offers autopay. Many do, and some will even give you a discount for setting it up. Its a good way to potentially lower your interest payments if your poor credit resulted in a high rate. It will also help keep you on track especially important for your credit, since making timely payments on your loan is one of the best ways to raise your credit score.