When you find yourself in escalating debt with little way forward, understanding the best options available to you can be difficult. That's especially true when every option will still be difficult, as is often the case for those whose debt has become unmanageable. At that point, debt relief and bankruptcy are the two tools available, but many people do not understand the differences between them and the choices involved.
Understanding debt relief
When you explore debt relief options, you are typically either negotiating with your creditors directly or working with a company that can help you consolidate those debts into a single payment that is more manageable for you. Steps you should take before consolidating debt include:
- Talking to your creditors to make a customized payment plan or to negotiate for lower interest
- Talk to a credit counseling service, which might be able to negotiate on your behalf
- Look for other options before taking out more debt
Once you have exhausted those options, debt relief in the form of a consolidation loan or a second mortgage becomes the only option other than bankruptcy. This can be a risky choice, though, because using debt to consolidate payments can still leave you open to escalating debt again if you get into another debt cycle.
Bankruptcy as an option
One of the biggest reasons that bankruptcy is so rare among private individuals is because it is highly stigmatized. Many view it as immoral, yet do not blink when companies repeatedly use it to restructure and to avoid debt commitments that could bring them down. Consumer bankruptcies should be understood the same way - as business decisions, not moral ones.
There are two forms of bankruptcy open to most individuals. Chapter 7 is the conventional total bankruptcy route, and it does involve selling most assets other than your vehicle and household furnishings. Chapter 13 allows you to retain many of your assets, but it also requires you to fulfill a payment plan before your debt is discharged.
The consequences of filing can be severe and last for a long period of time, often up to ten years. At the same time, though, the fresh start is often worth the cost for people with out-of-control debts.
What to do
If you are unsure about your route forward, the best thing you can do is consult an attorney. Bankruptcy attorneys understand the law and have the ability to make your options clear to you, so that you have a better understanding of all of the consequences of your choices.