Many people encounter overwhelming debt at some point during their life, and when they do, find themselves asking what their options are to address the situation. One of the first things that usually comes to mind is bankruptcy; another may be something along the lines of debt negation or consolidation. This guide will serve as a brief insight into what these different options offer, and the benefits and possible drawbacks that they entail.
In debt consolidation, the idea is generally to take out a loan to pay off some or all of your existing debts and then pay back this single consolidation loan instead. This is often advertised as an opportunity to replace multiple payments with a single payment and perhaps decrease the interest rate on a portion of this debt.
The significant drawback here is that you still agree to pay off 100% of what your creditors claim you owe them, usually with ongoing interest that will continue to build over time. This would include paying off money owed to creditors for interest already accrued before this new loan is taken out. For many people struggling with overwhelming debt, this isn’t an option.
Conversely, the idea behind debt negotiation (also called debt relief) is to limit the amount that you pay to your creditors by negotiating down the total amount that you owe and having you repay this new amount back to your creditors over the course of months or years. However, this process can lead to a number of issues.
Firstly, debt negation is completely voluntary for creditors, which means they do not have to if a creditor does not want to negotiate or settle. Additionally, creditors are dealt with individually, meaning that there can be shifting goalposts concerning when certain debts might be resolved through the negotiation process if they are ever resolved at all. Lastly, with debt negotiation, you always agree to repay a substantial portion of what your creditors claim you owe them, often through unmanageably high monthly payments. For many people struggling with overwhelming debt, this, too, is not a feasible option.
Bankruptcy offers a different path entirely. Unlike either debt consolidation or debt negotiation, bankruptcy is a process that is established by law and gives you the protection of the courts for as long as you are engaged in it. It is also something that all of your creditors must participate in. Unlike debt negotiation or debt relief, where a creditor can simply refuse to negotiate, bankruptcy requires the creditors to come to the table, and the discharge of debt that you receive at the end of the bankruptcy process is an absolute protection against future collection for any of the debts that are included in it.
Bankruptcy also allows you to eliminate debt with limited payment to creditors or, in some situations, no payment. If you do make a payment to your unsecured creditors through bankruptcy, it will almost always be an extremely small fraction of the total amount that is owed, essentially allowing you to eliminate the debts for pennies on the dollar. There are also options in bankruptcy to arrange payments to creditors so that they fit your specific financial circumstances and budget, such as through a Chapter 13 bankruptcy. In speaking with your bankruptcy attorney, they will advise you on how different paths in the bankruptcy process can be specifically tailored to fit your unique circumstances and needs.
Lastly, bankruptcy offers you many tools, opportunities, and protections only available through the bankruptcy process. Whether this be the automatic stay that prevents creditors from garnishing your paycheck or starting a new collection action, or a Chapter 13 plan that can help you catch up on your mortgage or car payment, there are many resources available through the bankruptcy process that can be leveraged to make sure that you get the best possible result from your bankruptcy filing.
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If you are currently struggling with overwhelming debt and you’re wondering what the best option to help you resolve this situation might be, please feel free to call us! Our highly experienced staff would be happy to speak with you about the resources available through bankruptcy. When the time is right, or when you are ready, please don’t hesitate to contact Minnesota’s most kind and helpful bankruptcy law firm by going now to www.lifebacklaw.com.
