Should You Hire a Debt Relief Service to Avoid Bankruptcy?

Mihai-Alexandru Cristea 20/12/2021 | 10:06

Are you struggling with clearing your debts? Debt can be overwhelming, no matter the source or reason for your debt. It could be a result of an illness, overspending, student loan payments, and so on. Debts, for whatever reason, are stressful and overwhelming when you can’t pay them. It gets more frustrating when the credit card companies and their collection agencies keep calling you about the payment. 

 

One way to get out of this situation and get your financial burden under control is to seek a debt relief service. Let us explore all you need to know about debt relief services and how they can be used to avoid bankruptcy. 

What is debt relief?

Debt relief refers to the several measures that are taken to partially cancel or completely forgive a debt. It also involves stopping or slowing the growth of debt to make it easier for the borrower to pay up. Individuals and companies in debt can find debt help at SFgate.com as there are several relief options that they can explore. Debt relief programs or services exist to offer borrowers a fair way to settle their debts and ease their financial burdens.  

Forms of Debt Relief

There are different forms of debt relief, each working differently from other forms of debt relief. Each form of debt relief also has its specific pros and cons. 

The five major forms of debt relief are;

Credit counseling

Sometimes all it takes for a debtor to manage their debt properly is budgeting. With budgeting, a consumer can monitor how they receive money and spend it. This will help to point out the areas where they are spending excessively. This should typically be an effective type of debt relief, but barely 40% of consumers follow their budgets. Credit counselors are professionals and experts at budgeting. They can counsel and educate consumers on how best to budget their funds. 

Debt consolidation

As the name suggests, debt consolidation is a financial strategy that combines several bills and debts into one single debt. The debt is then paid off with a consolidation loan or a debt management plan. This type of debt relief reduces the interest rate on the debt and reduces the required monthly payment for your debt. 

Debt management

This service is provided by debt management companies. They work with creditors to help you reduce the interest rate and monthly payment on your debt. Debt management is a part of debt consolidation plans and helps consumers manage and control their debts by drastically reducing the interest rate and monthly payments they have to make on their debt. 

Debt settlement

This type of debt relief involves a negotiable agreement with your lender on how you can settle your debt for less than the initial amount owed. A company that offers this kind of service will help you negotiate with your lender so you can settle your debt for less than what you owe—sometimes significantly less.

Filing for Bankruptcy.

Bankruptcy is the last resort for debt relief that debtors fall back on when the other four debt relief types won’t work to settle their enormous debt. 

How does it work? A debtor, whether an individual, a corporation, etc., goes to court to file for bankruptcy, having incurred an overwhelming debt such that they do not think they have the money to cover the debt. 

A judge and court trustees will then thoroughly examine the assets and liabilities during the court proceeding. This is so the court can determine if, truly, the debtor does not have enough assets to pay their debts. The court will then discharge the debt, which means the debtor is no longer legally expected to pay it. Otherwise, the court will dismiss the case if it believes that the debtor has enough assets to settle their debts.

Bankruptcy laws exist to give debtors a chance to start over after their finances have collapsed, and they are unable to settle their financial burden naturally. 

However, don’t think of bankruptcy as an easy escape from your financial burden, as there are long-term penalties you will face after filing for bankruptcy. This penalty will be taken off your credit report, and it will carry on for 7–10 years, making it difficult for you to access loans. 

The good news about filing for bankruptcy is that it often gives people a chance to start over following their collapsed finances. 

Take a look at the cases of bankruptcy filings for the year 2020. 

  • 544,463 bankruptcy filings were recorded. 
  • 381,217, and 70% of those filings were for chapter 7 bankruptcy. 
  • 154,341 of the bankruptcy filings were under chapter 13.
  • Lastly, chapter 11 bankruptcy comprised 8,113 cases.

The American Bankruptcy Institute found that 94.9% of chapter 7 bankruptcy filings from 2020 were successfully discharged. 43.2% of the chapter 13 filings were successfully dismissed. 

This shows that bankruptcy truly serves its purpose of relieving debts, especially in the case of chapter 7 bankruptcy. 

Note: Bankruptcy cannot settle all types of debts and financial obligations. 

Bankruptcy does not discharge these types of debts

  • federal student loans, except under certain conditions
  • loans accessed through fraudulent means
  • debts that arise after filing bankruptcy
  • debts that result from personal injury gotten from driving while intoxicated
  • debt from court-ordered alimony; and child support.

 

As for the big question you may be asking yourself, should I file for bankruptcy? You have to think deeply about it and determine if you can settle your debts within five years or less. If you are unable to pay off your debts within five years, you should consider filing for bankruptcy.

Like we stated earlier in this article when your debt becomes overwhelming for you, you have to seek out debt relief so you can settle the debts. You can choose from any of the five types of debt relief we discussed in this article, depending on the nature of your debts and assets.

You can expect to see a negative impact on your credit report if you use debt consolidation, debt management, or debt settlement. Their effects on your credit report could last three to five years or even seven years. 

If you are going to decide whether to stick to any of the three debt-relief options above, you will not file for bankruptcy. What you should consider isn’t how to escape the effect bankruptcy will have on your credit report, but your ability to settle the debt without filing for bankruptcy. 

The best way to answer this question is by consulting professionals like bankruptcy lawyers so you can decide on the best debt relief option to pick. 

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