Debt Relief vs. Bankruptcy: Which is Right for You?

Consumer debt has reached record highs in America – and whether debt stems from illness, unemployment, or irresponsible spending habits, it can be overwhelming. In your journey to becoming debt-free, it may be tempting to turn to quick-fixes. Keep in mind, though, that these rarely work and if an option sounds too good to be true, it probably is. And when it comes specifically to bankruptcy, many debtors erroneously equate the process with other forms of debt relief when, in reality, it is a last resort – a viable option for many, but a last resort, nonetheless. A bankruptcy filing will have far-reaching impact, remaining on your credit report for ten years and potentially affecting your career prospects and your borrowing future. In this article, we will explain the basics of the bankruptcy process and note how it differs from other debt relief options, dispelling the myth that they are one and the same – and that both are feasible options for every debtor.

Bankruptcy Basics

For consumers, two types of bankruptcy filings apply: Chapter 7 and Chapter 13, both filed in federal bankruptcy courts. Chapter 7, or “straight” bankruptcy, is a liquidation provision. In short, it involves the sale of any and all of your assets that are not declared exempt. In a Chapter 7 filing, some of your property may be held by a court official called a trustee, or the court may order you to turn it over to your creditors. Chapter 13, on the other hand, will involve the cooperation of the debtor, the court, and creditors to devise a payment plan. Bankruptcy can be a costly process. Filing fees cost several hundred dollars, and attorneys’ fees accrue quickly. Not to mention, the bankruptcy process isn’t always seamless and straightforward. If your creditors object to your filing or the plan that is proposed, it may turn into a longer, drawn-out type of litigation called an “adversary proceeding,” which can last for months or even years and cost you tens of thousands of dollars. While the bankruptcy process may help you resolve unsecured debts and hit pause on any foreclosures, seizures, and garnishments, it is not a quick fix. Not all debts are dischargeable through bankruptcy, most notably, student loans, alimony, and child support. Moreover, debtors face certain qualifications and hurdles before they can even file, for instance, seeking credit counseling from a government-approved organization within the six months before filing, and satisfying a “means test” for Chapter 7 filings to confirm your income does not exceed a certain amount.

The Debt Relief Difference

Although many consumers view the bankruptcy process as a “fresh start” to resolve or clear debts, debt relief involves an approach to either repay debts in full or to negotiate with creditors to forgive or reduce certain amounts - an approach that can also help you find financial freedom and clean up your debts. Debt relief options, like debt consolidation loans, credit card consolidation, and debt settlement, are all options that you can employ without using the court system. In fact, in many cases, you can navigate a debt relief plan on your own, without any third-party intervention.