When managing debts becomes too much, a choice 債務重組 needs to be made. Should a file for bankruptcy be made, or should one of the debt settlement programs be applied for? This is a choice that needs to be thought over deeply before any move is made.
The reason this decision is not that simple is that there are serious repercussions to choosing bankruptcy, and even if that is the only logical option, there are a number of bankruptcy chapters under which debtors can file. Increasingly, a Chapter 13 bankruptcy plan is becoming the preferred option, but other chapters are 7, 11, 12, and are just as efficient in ridding oneself of debt.
However, while debt settlement is more expensive and less damaging to credit histories, they do not always turn out to be the saving grace that applicants would like them to be. So, when clearing existing debts, which of the two is the right one to choose?
Check Your Own Status
The first step in ascertaining the best choice is not to look at the options, but to look at yourself. Depending on your credit and financial status, either bankruptcy or a debt settlement program will provide the most effective solution. And reading your credit report is the starting point.
Once the true extent of your debt problem is confirmed, it is possible to work out what the right debt relief option is, based on what kind of deal is affordable. When debts are slightly greater than income, then a Chapter 13 bankruptcy plan is likely to be the right choice. When it is very much greater, Chapter 7 might be the most plausible choice.
However, if there is still some income more than debts, then a settlement deal is likely to be affordable. The complication is that, while a settlement involves clearing existing debts for a fraction of their worth, it still requires a lump sum payment to complete the deal. Saving up that lump sum is the problem.
Terms of Bankruptcy Chapters
There are four chapters to the Code of Bankruptcy that any bankruptcy case can be filed under: chapters 7, 11, 12, and 13, The key differences between them relate to the extent of the poor financial situation an applicant has, and the likelihood that a debt settlement program cannot be approved.
Chapter 7 is filed by those seeing liquidation or straight bankruptcy where debts are completely written off. The other options relate to reorganizing debt, with Chapter 11 filed by businesses seeking to reorganize their debt, but not to liquidate. Chapter 12 is applicable to family farmers seeking to reorganize.
However, a Chapter 13 bankruptcy plan is sought by individuals who earn the average income or higher in the state the case is filed in. The court decides on the terms of the debt reorganization, and continuously monitors the repayment progress. So, clearing existing debts is done under strict conditions.
Bankruptcy or Settlement?
The basic deciding factor is cost, with the fees associated with a debt settlement program almost double that of the costs of filing for bankruptcy. But there is also the matter of monthly repayments and other terms associated with the type of bankruptcy. If the Chapter 13 bankruptcy plan is more affordable than the settlement plan, it makes sense to choose the former.
But the consequences of the decision need to be considered too. For example, clearing existing debts through a settlement plan will reduce a credit score by around 50 points, but bankruptcy cuts it by a minimum of 200 points. And it will be on your record for 10 years, while with a settlement plan, credit is returned after 2 years.
For most people struggling with debt, filing for bankruptcy isn’t the first solution that pops into mind. If you’re buried under multiple credit cards and loans, chances are that you’ve considered debt consolidation. By combining your debts together into one monthly payment, it’s easier to keep track of repaying your debt. Plus, you also enjoy the benefit of one payment instead of staying on top of bills from multiple loans and lenders. While consolidating your loans and debts is a great opportunity, is it really the best alternative to bankruptcy?
Why Bankruptcy is the Best Option
If you’re stuck between the choice of consolidating your loans and debt versus filing for bankruptcy, it’s important to consider your entire financial situation. First, be sure to check your credit report. Aside from seeing your overall score, analyze your negative items such as late payments. This will allow you to fully see the extent to which you’re indebted.
Once you have this information, you can calculate the total debt you owe and compare it to your total income. If your income isn’t equal to or doesn’t exceed the basic costs of living, then consolidating your loans isn’t for you. Even if your income exceeds your basic financial needs, don’t cross bankruptcy out of the picture until you’ve considered the following benefits:
1.Consolidation. A Chapter 13 debt reorganization plan essentially gives you the same benefits of consolidating your loans and debts. Aside from combining your debts into a single, monthly payment, bankruptcies provide you certain legal protections and advantages that a traditional consolidation can’t.
2.Automatic Stay. If you’ve ever fallen behind on your payments, then you know how cruel and relentless collectors can be. They’ll flood you inbox, mailbox, and keep your phones ringing throughout the day. Fortunately, filing for bankruptcy initiates what’s known as “automatic stay,” which immediately prevents nearly all collection activity against you. On the other hand, consolidating your loans and debts doesn’t stop any of these harassments.
3.Reduced Debt. While consolidating your loans and debt will make it more bearable to survive financially, bankruptcy gives you the opportunity to discharge debt. Even in a Chapter 13 filing where debts are reorganized, certain qualifications will allow you to only pay as little as 10% of your unsecured debts.
4.Bankruptcy Attorney. Working with a bankruptcy attorney provides you with insight, legal guidance, and professional leadership to help you achieve a fresh financial start. Compare this to consolidating your loans and debts, where you largely work on your own and you don’t have an ally working in your best interests. Because a bankruptcy attorney is trying to help you achieve the best outcome possible, you know that your actions will only strengthen your financial profile.