Is Bankruptcy the Right Option for You?

If you are like millions of Americans struggling under the weight of credit card debt, you may feel that your life has spiraled out of control. You can take control back by exploring your options for credit card relief. One smart option to consider is debt settlement.

 

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Here are some items you will want to know during the decision-making process:
  • What is bankruptcy?
  • What are the types of bankruptcy and
  • how do they work?
  • Who should declare bankruptcy?
  • What are the alternatives to bankruptcy?
  • Is debt settlement a good alternative to bankruptcy?
  • What are the pros and cons of bankruptcy?
  • Does bankruptcy relieve you of all debt?
  • How does bankruptcy impact your credit score?
  • How to avoid bankruptcy with a debt settlement plan.

What Is Bankruptcy?

Bankruptcy is a legal process that allows debtors to repay a portion of their debts, or to have all debts forgiven. Through bankruptcy, debtors can gain relief from most of their debts, although there are some exceptions. Bankruptcy typically does not offer a reprieve from:

  • Child support obligations
  • Student loans
  • Certain types of personal income taxes
  • Criminal fines

Bankruptcy aims to give debtors in a hopeless financial situation a way to start over. It is not designed to be an easy or attractive way of avoiding debt repayment. It comes with significant costs and restrictions. The most obvious cost of bankruptcy is major credit score damage. People who opt for bankruptcy should know that it is unlikely that they will be able to obtain future loans at a favorable rate for many years after filing bankruptcy.

State law determines the exemptions associated with bankruptcy, meaning the assets the bankruptcy filer may keep after liquidation. Exemptions typically cover one’s house, car, clothes, and first vehicle. Most states do not exempt second vehicles, collectibles, antiques, etc. The filer may have to forfeit such assets to the trustee.

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Bankruptcy by the Numbers

Over the last decade, millions of Americans chose the path of personal bankruptcy to address their debts. In 2019 alone, 752,160 people filed personal bankruptcy cases. In 2015, the number of bankruptcy cases was 794,975, leading to forgiven debt amounting to $47 billion. This translated to average household savings of $59,000.

Chart - Personal Bankruptcy Cases in the US - ClearOne

(Created with Amcharts.com, using data from the American Bankruptcy Institute.)

However, it should be noted that bankruptcy should be considered only as a last resort in cases of extreme financial hardship, largely because of the significant impact such a course has on your credit score. Bankruptcy can remain on your credit report for 7 to 10 years depending on the type of bankruptcy for which you qualify.

 

What Are the Types of Bankruptcy and How Do They Work?

Ninety-nine percent of bankruptcy filings are Chapter 7 or Chapter 13 filings. Of these, around 60 percent seek Chapter 7 coverage, and 40 percent opt for Chapter 13, so these are the two bankruptcy options discussed here.

How Chapter 7 Bankruptcy Works

When a debtor files for Chapter 7 bankruptcy, an ‘automatic stay’ comes into effect. This ‘stay’ lasts until the end of the bankruptcy process and it prevents creditors from making any collection efforts. It also denies creditors the possibility to sue the debtor.

The bankruptcy filing notice pops up on the credit report of the debtor just as quickly as the ‘stay’ goes into effect. This ‘black mark’ remains on the credit report for 10 years in the case of a Chapter 7 bankruptcy, and seven years in case of a Chapter 13 filing.

Record of the debts that the bankruptcy proceedings discharge remain on the debtor’s credit report for seven years as well.

Typically with a Chapter 7 filing, it should not take longer than three to four months for your debts to be discharged.

To qualify for Chapter 7 under the provisions of the 2005 BAPCPA, the monthly income of your household needs to be under the state median for households of similar size.

After a Chapter 7 debt discharge, you may not file another Chapter 7 bankruptcy for six years.

How Chapter 13 Bankruptcy Works

Chapter 13 is more about debt consolidation than debt discharging.  As soon as a court launches a Chapter 13 proceeding, home foreclosure proceedings against the filer are required to stop. The debtor then submits a financial reorganization and debt repayment plan. He or she proceeds to make monthly payments under the plan the court approves, in a consolidated manner.

It is the job of the impartial trustee to distribute the payments to the debtor’s creditors.

The length of the repayment plan is three-to-five years. The repayment plan is not lenient. It aims to pay creditors at least as much as they would receive under other types of bankruptcy. It also does not shy away from seizing 100 percent of the filer’s disposable income for repayments.

 

To be eligible for Chapter 13, you need to fulfill a series of requirements.

  • You need to undergo credit counseling before filing.
  • Your individual unsecured debts cannot exceed $394,725.
  • Your individual secured debts cannot exceed $1,184,200.
  • You need to submit an income/monthly expense report to the court.
  • You have to list your creditors as well as the amounts you owe them.

 

When Is Bankruptcy an Option?

The person who typically resorts to this debt resolution method is in a dire financial situation. This means that he or she:

Has massive debts and no hope to repay them.

  • Is behind in mortgage payments.
  • Is in danger of foreclosure.
  • Is being pressured by collectors.
  • Cannot budget his/her way out of debt, even after the addition of a second job.
Remember that bankruptcy may not be the best solution in your case. Discuss your options with a qualified bankruptcy attorney before even thinking about filing.
 
 

What Are the Alternatives to Bankruptcy?

Other alternatives may be debt settlement, debt consolidation, credit counseling, and debt reduction by your own means. Credit counseling and debt consolidation loans are generally chosen by people with a smaller debt load and good to excellent credit. These methods of debt relief may not work for those with a larger amount of debt who are considering bankruptcy.

 

Is Debt Settlement a Good Alternative to Bankruptcy?

Debt settlement, on the other hand, can be an excellent choice for those hoping to avoid bankruptcy.

Unlike bankruptcy, debt settlement does not require a court filing. You are not required to retain an attorney or additional financial counseling. You do not pay any upfront fees. While you make payments, you do not have to repay your debts in full.

Your creditors settle for less because they know you have left open the option of bankruptcy, which could leave them with little chance to collect your debts.

 

  Debt Settlement Bankruptcy
Credit Score No set requirement No set requirement
Qualifications At least $10,000 in unsecured debt and regular income Must document income and expenses for court. Typically must have no disposable income. Debt usually >50% of your annual income. Income below the median level for your state.
Upfront Fees $0 $500 to $3,500 - court filing and attorney fees can vary
Financial Benefits Provides short-term relief with a low monthly payment, and long-term relief with avg. term of 24-60 months Forgives most unsecured debts, like medical bills, credit card debt, and personal loans.
Credit Impact Significant, but not as bad as bankruptcy, which has the biggest impact to credit according to the FTC Severe impact lasting 10 years
Other Factors
to Consider
May reduce original debt load by half (exclusive of fees) Typically need to be current with tax filing. Must undergo credit counseling 180 days before filing. Irrevocable.

 


Pros and Cons of Bankruptcy

Although bankruptcy is sometimes the only answer for someone in a desperate financial situation, it should not be entered into lightly. Before deciding to go this route, you should make sure you have exhausted all your other debt relief options. Debt Settlement may be a viable alternative and a ClearOne Certified Debt Specialist can walk you through your options and help you decide what may be the best choice for you. Below, we've outlined some of the pluses and minuses of bankruptcy:

 

Pros

  • You gain protection from debt collectors and creditors for the duration of the bankruptcy proceedings, in the form of a ‘stay.’ (Chapter 13, in particular, allows you to keep your assets during the stay.)
  • The payment plan for Chapter 13 can accommodate legal fees.
  • Chapter 7, in particular, carries a high likelihood of discharging all qualifying unsecured debt. 99% of those who file successfully achieve that goal.
  • The waiting period after an unsuccessful Chapter 13 filing is just 180 days.
  • With a Chapter 13 filing, you can renegotiate the payment plan through the duration of the program.

Cons

  • Chapter 7 requires a means test and there are stringent qualifying requirements.
  • Both Chapter 7 and Chapter 13 bankruptcies have a high negative impact on your credit score that lasts for 7-10 years.
  • Filers likely need legal representation. The process is costly and intricate. Attorney fees can cost thousands of dollars.
  • After filing for Chapter 7, you cannot file again for 6 years.
  • Chapter 13, in particular, carries a low success rate. Less than 40% of those who file under Chapter 13 complete their plans successfully. Failed plans mean the resumption of the original pre-bankruptcy debt situation.
  • For Chapter 13 filings, the trustee will renegotiate the payment plan if the financial situation of the debtor improves.

 

Does Bankruptcy Relieve You of All Debt?

A Chapter 7 bankruptcy relieves you of all qualifying unsecured debt. There are certain exemptions like child support obligations, criminal fines, student loans, etc.

A Chapter 13 bankruptcy requires you to repay at least as much of your debt as you would through a Chapter 7 bankruptcy.

On the other hand, with debt settlement, all of your creditors do get repaid a portion of what you owe. Before taking a drastic step like bankruptcy, you owe it to yourself to consider ClearOne Advantage debt settlement as a viable option.

 

How does Bankruptcy Impact your Credit Score?

Bankruptcy leaves a huge ‘black mark’ on your credit report for 7-10 years.

A debt settlement plan with ClearOne Advantage will also have a negative impact on your credit score, but that impact will not be as severe as the impact of bankruptcy, which, as the FTC attests, should be considered as a last resort.

 

How to Avoid Bankruptcy with a Debt Settlement Plan

Debt settlement programs can be lengthier than bankruptcy, but if the option is available to you given your financial situation, you should likely take it over bankruptcy.

ClearOne Advantage and our Certified Debt Specialists are here to help take care of the debt relief process for you. Give us a call at 888-340-4697. While our goal is to get you out of debt in a reasonable amount of time with a payment you can afford, we are also committed to providing you with the support, tools, and resources to help you gain control of your finances.

Disclaimer: ClearOne Advantage is not a law firm and does not provide legal advice.  If you are considering bankruptcy you should consult a licensed attorney

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