Debt can be mildly stressful at best, and absolutely crippling at worst. And unfortunately, after the coronavirus pandemic rocked the world – and the American economy – throughout the past year, thousands of Americans found themselves knee-deep in seemingly insurmountable financial troubles.
After a year or more of watching your balances increase and interest accumulate on your loans, you may be desperate for an easy way out. There are options – but for many Americans, the solutions often feel scarier than the debt itself. Words like “debt relief” and “bankruptcy” can dredge up a whirlwind of emotions and preconceived opinions, and for good reason. There is no one-size-fits-all, easy solution to debt (short of suddenly winning the lottery or inheriting enough cash to simply pay the balance in full). Debtors would do well to acknowledge this.
Nonetheless, two of the most popular options for escaping debt – a debt relief program and bankruptcy – have their benefits, so long as they are kept in their proper place. Bankruptcy is an extreme, last-resort option that can get you out of debt, but also leave a lasting mark on your credit. On the other hand, debt relief programs provide a less extreme recourse, but can often be costly and pose obstacles for some consumers – especially those with poor credit.
If you are considering bankruptcy or debt relief as a solution to your financial issues, reach out to a financial advisor or attorney to help you do your due diligence. Regardless of your situation, it’s vital to understand both the short and long-term impacts of your choices. To help, here is a brief list of the top pros and cons of each option: bankruptcy and debt relief. Please note, however, that this does not supplant the tailored, personalized advice of an experienced attorney or financial advisor.
Bankruptcy Impacts Your Credit for up to Ten Years
While bankruptcy may seem like an easy way out, keep in mind that a consumer bankruptcy filing under either Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code is a matter of public record. This means that the credit agencies can and will find out about it. This can severely impact your credit score.
Your score will tank as soon as your debts are discharged through a bankruptcy filing. This is because your debts will be reported to the credit bureaus as not satisfied, or not paid in full. These notes can stay on your report for seven to ten years, depending on the specifics of your bankruptcy filing, and they can impact your employment prospects to your ability to obtain a loan in the future.
Bankruptcy Can Eliminate or Reduce Your Debt Payments
At its most basic level, bankruptcy is essentially debt forgiveness wrapped up in a formal legal process. If you prevail in your bankruptcy hearing, the court may discharge your debts, with some exceptions (like student loan payments and back taxes). In a Chapter 13 bankruptcy, you can apply for debt consolidation and a feasible repayment plan. Both of these options can give you a clean slate and an opportunity to start fresh.
Both Bankruptcy and Debt Relief Can Cost You
Nothing is truly free, and debt relief is no exception. Bankruptcy filings involve steep court fees and, of course, attorneys’ fees, which may not be recoverable. And debt relief programs frequently charge an upfront cost for their services. Many will apply a fee equal to a percentage of your debt amount, while others may simply charge a standard fee. In some cases, working with a debt relief agency may end up costing you more than you would have paid by simply paying off your creditors: this may happen in cases where you still need to pursue a bankruptcy filing or other legal action even after working with a debt relief agency.
Debt Relief Can Make Your Payments Less Burdensome
Through avenues like debt consolidation, a debt relief agency can help you consolidate and streamline your monthly payments so they are less of a hassle. For example, with debt consolidation, you can roll your debts into a single amount owed, with a new, negotiated interest amount and repayment timeline, and make one single payment instead of multiple payments to different creditors. Many debtors find this option far less stressful than simply managing their payments separately.
Bankruptcy Involves Litigation, but Debt Relief Clients Can End up in Court Too
While bankruptcy inevitably involves the legal process, clients who enroll in debt relief programs are not guaranteed a simple, straightforward solution. For example, debt relief counselors will only negotiate with your creditors once your accounts become delinquent. Nonetheless, some creditors will move swiftly in turning your account over to a collections agency even before your agent can contact your creditors. Collections companies tend to be far less forgiving than original creditors in negotiating down an amount owed, offering repayment extensions, or otherwise cooperating with debtors, and so these cases can often end up in small claims or district court (depending on the amount owed).
Bankruptcy Offers A Clean Slate
Though not a panacea, bankruptcy is known for providing debtors a fresh start by discharging their debts. If you are a candidate for either a Chapter 7 or Chapter 13 filing, speak with an experienced North Carolina corporate bankruptcy attorney to learn more about your options.
In Every Case, Do Your Due Diligence.
Ultimately, neither debt relief nor bankruptcy may help you get out of debt. Perhaps for you, the best option is to simply press on and pay down your balances. If you are struggling with debt in your business, reach out to one of our experienced business and tax attorneys to learn which option, if either, is best for you.