Dealing with substantial debt can often feel overwhelming or impossible. However, you have more options for addressing debt than you may realize. Two common ways to deal with major debt are debt relief and bankruptcy. Each comes with its own set of risks and benefits — and you should ensure you understand those risks and benefits before committing to one or the other. So what is the difference between debt relief and bankruptcy? Here’s a closer look.
Before making a decision on how to get out of debt, you should thoroughly understand all potential options. A bankruptcy lawyer can discuss your situation with you and help you make the best choice for your finances and future.
What Is Debt Relief?
You May Be Able to Get Out of Debt Without Paying It All
The term “debt relief” usually refers to debt settlement — often with the help of a debt relief company. While some people may consider debt consolidation a form of debt relief, debt consolidation is different enough from traditional debt relief that it’s a good idea to evaluate it on its own.
There are two main ways people in debt commonly pursue debt relief:
- Negotiating debt settlements with collectors and creditors on their own
- Working with a debt relief or debt settlement company
Here’s a brief overview of how each type of debt settlement works:
Negotiating Settlements on Your Own
When you settle debt directly with a creditor, you resolve the debt by paying less than the amount you owe. While debt settlement agreements can vary significantly, most people who negotiate debt settlements on their own resolve the debt by paying 40% to 60% of the original amount owed.
Creditors don’t routinely agree to allow borrowers to pay only some of a debt. However, if you are on the verge of bankruptcy, your creditors may be more inclined to accept a settlement. Creditors know that if you declare bankruptcy, there’s a good chance they’ll receive nothing at all.
Working With a Debt Relief/Debt Settlement Company
Debt relief or debt settlement companies typically promise to settle your debt for you — but it usually involves a fee. In many cases, the company requires you to pay a lump sum up front. They then use that lump sum to pay settlements once they’ve negotiated them with creditors. However, depending on the company, a significant portion of the lump sum may go toward the company’s fee.
The Consumer Financial Protection Bureau (CFPB) cautions consumers to consider the following before working with a debt settlement company:
- Many creditors refuse to negotiate with any debt settlement company.
- Debt settlement companies can’t guarantee successful settlement.
- In most cases, these companies can’t negotiate better settlements than you could on your own.
If you’re considering working with one of these companies, you should make sure you understand exactly how much of the money you pay goes toward settling your debts. While there are some legitimate debt relief companies, the debt relief/debt settlement industry includes countless scam companies as well.
Struggling with debt? We may be able to help. Call Fesenmyer Law Offices, LLC at 614-228-4435 (Columbus), 937-222-7472 (Dayton), or 877-654-5297 (Cincinnati) to set up your free bankruptcy consultation today.
The Pros and Cons of Debt Settlement
Deciding whether to pursue debt settlement involves weighing the benefits and drawbacks. Here are some of the main advantages to settling debt:
- You pay less than you would if you repaid the debt as agreed.
- It saves you from the stress and expense of being sued for debt.
- It can help you get out of debt faster.
- Unless you work with a debt settlement company, settling debt doesn’t cost you anything.
However, settling debt isn’t without drawbacks:
- Settling your debt has a negative impact on your credit score.
- If you work with a debt relief company, you may owe a significant fee.
- Creditors are under no obligation to negotiate settlements.
- If you work with a debt relief company, you may run the risk of being scammed.
Not sure if debt relief is right for you? Fortunately, it’s not your only option.
What Is Bankruptcy?
When you declare bankruptcy, you can eliminate or restructure many types of debt. These are the two most common types of Individual bankruptcy:
- Chapter 7 eliminates most debts but may require you to liquidate some assets.
- Chapter 13 restructures debt into manageable payments but lets you keep assets.
Generally, Chapter 7 is best if you have a low income and few assets. Chapter 13 is the better choice if you have consistent, reliable income and don’t want to risk losing some of your assets.
The Pros and Cons of Bankruptcy
Declaring bankruptcy has many potential advantages:
- It can erase unsecured debts and allow you to start fresh.
- It can halt foreclosure proceedings and protect you from creditors.
- While Chapter 7 may require asset liquidation, you may keep your home and other “exempt” property.
However, you shouldn’t make the mistake of thinking bankruptcy can wipe out all or most of your debt. It comes with downsides as well:
- Bankruptcy generally can’t help with back taxes, student loans, child support, and some other nondischargeable debts.
- Bankruptcy can significantly lower your credit score in the short term.
- It costs money to file for bankruptcy.
- If you rent your home, declaring bankruptcy may make it more difficult to be approved for a lease.
When choosing between debt relief and bankruptcy, there’s a lot to consider. This isn’t a decision you should rush.
Need Help Choosing Debt Relief vs. Bankruptcy?
The Right Legal Guidance Makes a World of Difference
Deciding whether to declare bankruptcy or pursue debt relief options can be extremely stressful — and the decision you make can impact your life for years to come. Fortunately, you don’t have to make this pivotal decision alone. Fesenmyer Law Offices, LLC has helped thousands of consumers in the same situation, and we may be able to help you too.
Need help getting out of debt and considering bankruptcy? Call Fesenmyer Law Offices, LLC at 614-228-4435 (Columbus), 937-222-7472 (Dayton), or 877-654-5297 (Cincinnati) to set up your free consultation today.
