One of the reasons it’s so frightening watching your debt grow is because life doesn’t pause to give you a chance to stockpile extra money and pay it all back. While you’re dealing with debt, you still have to pay bills. While you can streamline basic expenses like food, transportation, housing and more, there’s no way to outright eliminate them. Thus, many consumers find themselves in the difficult position of juggling existing debt while racking up new expenses.
Bankruptcy may sound tempting in the face of seemingly insurmountable debt. But it’s worthwhile to consider last-ditch solutions to avoid bankruptcy before going this route. Let’s take a closer look at the ramifications of declaring bankruptcy and the other options out there.
Chapter 7 vs. Chapter 13 Bankruptcy
Consumers can file one of two types of bankruptcy. Chapter 7 bankruptcy, also known as “liquidation,” is an option for lower-income consumers. It involves actually selling your property to pay creditors—potentially including foreclosing on your home and giving up certain valuables to repossession. It provides a fresh start by wiping out certain debts, like credit card balances, but at a steep price.
Chapter 13, or “reorganization,” bankruptcy allows consumers a chance to repay their debts and keep their property. However, it hinges on having enough stable income to make 3 to 5 years of monthly payments. Consumers making above a certain threshold of income are eligible only for Chapter 13 bankruptcy.
However, bankruptcy is far from a “get out of jail free” card. Your credit score will reflect that you filed for Chapter 7 bankruptcy for 10 years. Similarly, Chapter 13 bankruptcy will stay on your credit report for 7 years. Your score can drop upwards of 100 points, depending on your specific circumstances. And, of course, consumers used to utilize credit for important purchases often have a difficult time in the aftermath, as opening lines of credit is more challenging after filing for bankruptcy.
Before Bankruptcy, Consider These Solutions
Knowing how detrimental bankruptcy can be to your credit score and lifestyle, it’s prudent to research your options before taking any drastic measures.
- Debt Settlement
Debt settlement typically involves working with a company to negotiate down your principal amount of credit card debt owed. Creditors will often accept a settlement if they believe the alternative is getting nothing. Consumers make monthly deposits into a special bank account until they have enough to begin the negotiation process. Going this route will affect your credit score—but bankruptcy will detriment it more, which is why it’s worth considering settlement first. Above all, it’s important to partner with a reputable debt relief company for settlement purposes. The best way to avoid scams is by doing research. For example, seeking out information by company, like Freedom Debt Relief reviews, will help you get a better feel.
- Cash-Out Refinancing
This option is only available for homeowners but involves increasing your mortgage loan and getting the difference in cash. You are then able to use this money to pay down your credit card debts because they tend to have higher interest rates than a mortgage. However, consumers must be mindful that this option will increase the amount of long-term mortgage debt you carry.
- Debt Consolidation
Debt consolidation usually involves taking out a personal loan with a lower interest rate to pay off debts with a higher interest rate. Paying back the loan occurs via a series of fixed monthly payments. This is really only an option for consumers with good credit and manageable debt because it doesn’t reduce the amount you owe.
Some people find success with bankruptcy, but it’s always worth exploring last-ditch solutions to avoid severely impacting your credit for years to come.