Feel as if you were drowning in debt? For whatever it’s worth you’re part of a large group. Consumer debt is now higher than it ever has been before. We have seen reports that the average consumer owes more than $5000 just in credit card debt. When you add on mortgages, auto loans, personal loans, etc., this swells to an average of $15,325 per family. If you find yourself hopelessly in debt, you have two possible options – debt relief or declare bankruptcy. How can you know which might be best for you?
The option of last resort
Bankruptcy is usually considered to be a last resort. Why is this? It’s because of the long-term effect this will have on your credit worthiness. As reported in an article on the FTC website, information about your bankruptcy, including when you filed and when it was discharged, will stay in your credit report for 7 or 10 years. It will not only hurt your capacity for getting credit, it can hamper your chances of getting a job, auto insurance or even a place to rent. Plus, a bankruptcy will stay in your public record for your entire life.
Watch out for those bankruptcy ads
There must be a lot of people in trouble with debt as you can hardly turn on the TV or radio without seeing or hearing an ad that promises you can consolidate all of your bills into one monthly payment without borrowing any money or that you can stop creditor harassment, tax levies, foreclosures, garnishments, and repossessions simply by filing for bankruptcy. While some of this is true, not all of it is.
What a bankruptcy can and can’t do
A chapter 7 bankruptcy, which is the most popular, can discharge or dismiss most of your unsecured debts. And it can stop creditor harassment. However, it can do nothing about the past due taxes and foreclosures. A chapter 7 bankruptcy wills also not discharge student loan debts, child support and alimony or debts that were obtained through fraud. The reason why it can do nothing about a foreclosure is because that’s a secured loan and a Chapter 7 cannot discharge secured loans. This would also include auto loans.
You will need to go through credit counseling
Our Congress changed the bankruptcy laws a few years ago. One of these changes is that you must get credit counseling from a government-approved organization within six months before you file. You are also required to complete a debtor education course before your debts will be discharged.
The pre–bankruptcy counseling you will be required to complete will consist of a counseling session with an approved credit counseling organization. This typically includes an evaluation of your personal situation, a discussion of what alternatives you could take instead of declaring bankruptcy and a budget plan. One of these sessions typically lasts about 60 to 90 minutes. You can get this counseling in person, online or on the telephone. When you complete this counseling you must get a certificate proving that you completed it. You should make sure that the certificate you received is from a counseling organization that has been approved in the judicial district where you will file for bankruptcy.
Given the seriously adverse effect that a bankruptcy would have on your credit report and credit score, you should definitely investigate some other options before filing. Here are a few of them.
• Try credit counseling. Credit counseling organizations will work with you as well as your creditors to develop a debt management plan. Your plan will necessitate that you send money every month to the counseling service. It will then distribute the money to your creditors. Some of these agencies are nonprofit organizations and offer teir services free or for a very low cost.
• Talk with your creditors. Many of them may be willing to help you out with a modified payment plan.
• Consider all of your options before you take out a home equity line of credit (HELOC) or a second mortgage. While you could consolidate your debt
with one of these loans, they both require that you use your home as collateral.
If a debt consolidation loan interests you, watch this video to learn more about this works.
How to choose a credit counseling agency
• Will they help your develop a plan to avoid future problems?
• What are your fees?
• Can you afford its fees?
• What are the different services you offer?
• What are the qualifications of your counselors? Are the accredited or certified by some outside organization? What is the training they receive?
• What if I can’t afford your fees?
• How do you keep my information secure?
• How are your employees compensated? Do they earn more if I sign-up for certain services or is it a flat fee?
Consider debt settlement
Debt settlement has become increasingly popular over the past few years because it represents the only way to get debts reduced, which can help a person become debt-free faster than the five years that are usually required to complete a debt management plan. Another advantage of debt settlement is that it doesn’t require you to borrow more money. As the old adage goes, “you can’t borrow your way out of debt.”
Debt settlement will have an impact on your credit score but not as harsh a one as a bankruptcy. For example, most financial experts believe that a bankruptcy will lower your credit score by approximately 200 points but debt settlement will reduce it by only about 80 points.