In a nutshell, there are five basic ways to achieve debt relief, each of which is described briefly below. Which option is best for you will depend on your specific situation. Although they share certain aspects, these options vary greatly in the steps required, the costs involved and the short-term and long-term consequences to your financial picture. You would be well advised to confer with a financial consultant specializing in debt relief to carefully assess your situation, weigh your options and determine the best course of action for you. At Trident Debt Solutions, we have experience in all forms of debt relief and can assist you with determining the most effective route for getting you out of debt quickly.
Debt relief options fall into two categories: bankruptcy and non-bankruptcy. The two bankruptcy options available to individuals are called “Chapter 7 Bankruptcy” and “Chapter 13 Bankruptcy.” These names refer to the specific chapters of the U.S. Bankruptcy Code under which an individual can “declare bankruptcy.”
In a Chapter 7 bankruptcy, also referred to as a “liquidation” bankruptcy, you file a petition asking the court to discharge your unsecured debts. The court allows you to keep limited assets, such as a vehicle, home or income, when their value falls below pre-established thresholds. These assets are referred to as “exemptions.” Assets that exceed the allowed values are considered “non-exempt” and are sold (“liquidated”), with the proceeds being distributed to your creditors. Any debts that remain after the assets are liquidated and creditors paid are then discharged by the court. Chapter 7 bankruptcy is usually a good option for people who have high debt and limited income or assets. An important point to keep in mind, however, is that Chapter 7 bankruptcy covers only unsecured debt. That is, it does not eliminate the right of mortgage holders or car loan creditors to seize your property to cover your debt. So even if your car or home is valued below the exemption threshold, Chapter 7 bankruptcy may not be the best choice for you, because if you are behind on your mortgage or car payments you will likely not be able to keep that property.
Chapter 13 bankruptcy is usually referred to as a “debt adjustment” or “reorganization” bankruptcy. In a Chapter 13 case, you file a proposed budget and repayment plan with the court, showing how you will pay off some or all of your past-due and current debts over three to five years. The plan typically calls for only partial repayment of the debts. You are then required to make monthly payments to the Chapter 13 Trustee assigned to your case, which are then divided among your creditors according to the terms of the plan, until the debts are paid off. Chapter 13 bankruptcy is normally used for individuals or couples who have high income, high debt or tax problems, or face foreclosure.
Non-bankruptcy options include debt settlement (also referred to as debt negotiation, debt resolution, debt reduction and similar terms), consumer credit counseling and a do-it-yourself method of resolving your debt that involves systematically paying off your creditors over time.
Debt settlement, which is typically achieved with the assistance of a debt relief specialist such as a debt negotiation attorney, involves reaching an agreement with your creditors to reduce the amount that they are willing to accept to settle your debts with them—potentially by as much as half of what you owe them. It is also referred to as “debt negotiation,” “debt reduction,” “debt resolution,” “debt arbitration,” “debt solutions” and “debt management.” Another point of negotiation is the length of time over which the reduced amount can be paid; reaching a lump-sum debt settlement can often result in an even greater reduction in what your creditors will accept to satisfy the debt.
With consumer credit counseling, you work with a credit counseling company that deals with your creditors to work out a repayment plan. Consumer credit counseling services allow you to make one monthly payment to them and they pay your credit cards directly. With this option, you are still obligated to pay back all that you owe to your creditors, although usually at a reduced interest rate. In some cases the credit counselors can negotiate with your creditors to not only reduce your interest rate but also obtain extensions or get them to forgive late fees.
These supposed “counselors” claim to be working on your behalf, but the reality is that they are actually paid by the credit card companies—while they make money off you. It is quite possible that you can end up in even more debt than when you started, and the impact on your credit rating can be quite serious. Credit counseling may be a viable option if you have less than $20,000 in debt and make a reasonable income, and the proposed repayment plan fits your budget and will be completed in less than 36 months. In most cases, however, consumer credit counseling plans last from four to six years, which is too long and can damage your credit even further. People who have high amounts of unsecured debt should avoid this option, no matter how appealing the “counseling” companies try to make it sound.
The third non-bankruptcy option is often called the “snowball method” or “margin-acceleration method.” It is a do-it-yourself means of eliminating your debt whereby you systematically pay off your debts yourself, tackling those with the highest interest rates first. As each high-interest debt is paid off, you then apply the money you had been paying on it to the debt with the next-highest interest rate, etc., until all of your debt is paid off.
Determining which of these options is right for you can be a daunting proposition, especially if you have a significant amount of debt and/or numerous creditors. But no matter what your situation, your first and best option is to meet with a qualified financial consultant such as Trident Debt Solutions to help you find the best way to get out from under your debt and back on track to financial health.