There are a number of effective payment-plan solutions for unmanageable debt. Any of these alternatives, can give you a fresh financial start provided you stick with the plan. Debt management and counseling, debt settlement, debt consolidation and Chapter 13 bankruptcy each involve paying off all or a portion of your debts in an organized manner. Chapter 7 bankruptcy, on the other hand, involves wiping your financial slate clean and starting over.
Be aware that, at least initially, any type of bankruptcy or repayment plan (other than a debt consolidation) will have a negative impact on your credit rating. Lenders tend to view all debt restructuring plans as the equivalent of a Chapter 13 bankruptcy. But if you are deeply in debt and behind on your payments, your credit score is probably very low already. Improving your income-to-debt ratio by reducing your debt load can be the first step toward improving your score. If you choose an alternative that involves paying off your debts, it is important that you be able to make the required payments. Otherwise, you can end up owing more than you did when you started the plan, your credit may be harmed even further, and your only remaining option may be a Chapter 7 bankruptcy.
Alternatives to Bankruptcy
Debt Management and Debt Counseling
This option will help you get to the root of overspending problems and understand what you need to do to live on a realistic budget. There are many kinds of do-it-yourself debt management programs, but unless you are highly motivated and disciplined, you may find working with a debt management company or credit counseling agency more effective. After helping you create a budget and repayment plan, these companies will negotiate with your creditors to lower interest rates, stop late payment fees, reduce and consolidate monthly payments, and sometimes even reduce the amount of debt, so you can pay your bills on time. Debt management programs usually take three to five years to complete.
Debt Settlement
Debt settlement is the process of negotiating with creditors to get them to accept partial payments in full satisfaction of your debts. When you choose to work with a debt settlement company, you stop paying on your debts (creditors generally will not settle a debt until you are several months behind on payments) and instead start making monthly payments to the debt settlement company. The company holds your money in a special account until enough has been saved to pay off a creditor. This process is repeated, paying one creditor at a time, until all your debts have been paid. Debt settlements usually need to be completed within three years.
Debt Consolidation
Debt consolidation involves taking out a new loan to pay off old debts. The benefits can include a lower interest rate, a fixed interest rate, and the convenience of making just one monthly payment until you are out of debt. Debt consolidation can include all of your unsecured (e.g., credit card and medical) debts, but not your secured (e.g., home or car) loans. Sometimes the new consolidation loan is unsecured, but more often it is secured by a mortgage on your house. The pledging of a mortgage or other security for a debt consolidation loan is what allows you to obtain the best interest rate and pay your debt off most quickly. If you own your home, consolidation may be an attractive alternative. The decision should be made carefully, however. If you are unable to make the new loan payments, consolidation may adversely affect your ability to discharge debts in bankruptcy.
Bankruptcy Options
The two most common types of bankruptcy for individuals are Chapter 7 (liquidation) and Chapter 13 (debt adjustment). Basically, you may file under Chapter 7 if your average monthly income for the six months immediately preceding the bankruptcy filing does not exceed the median income in your state, or if your income is insufficient (after subtracting certain expenses for basic necessities) to repay any part of your debts. If you have a regular income and do not qualify for Chapter 7, you may still be able to file under Chapter 13.
Chapter 7
A Chapter 7 bankruptcy allows you to discharge or get rid of certain types of unsecured debts and keep exempt property. In many cases, Chapter 7 debtors are able to keep all of their possessions. Dischargeable unsecured debts include credit card balances, personal loans, debts remaining from repossessed property, utility bills, and medical bills. In some cases, you also may be able to discharge old income and property tax debts. Chapter 7 bankruptcy is an effective alternative for debtors who own little property and have unmanageable debt. Often unemployment, unexpected medical expenses, or divorce will prompt a debtor to seek protection from creditors by filing Chapter 7 bankruptcy.
Chapter 13
A Chapter 13 Bankruptcy involves entering into a three- to five-year court-approved payment plan to pay debts, or a percentage thereof, in an affordable manner. Chapter 13 may be a viable option if you are behind on secured loan payments on your car or house and want to avoid a repossession or foreclosure; if you have a regular income and can pay a portion of your debts; if you owe debts (such as taxes, child support arrearages, and divorce debts) that are not dischargeable under Chapter 7; or if you wish to keep valuable assets that you would lose under Chapter 7.
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