The Best Options for Dealing with Overwhelming Debt: Is Bankruptcy the Right Choice?

Written By: Emil FleysherSeptember 25, 2023
The best option for dealing with overwhelming debt

Dealing with overwhelming debt can feel like an insurmountable challenge, but several options are available to help you regain control of your financial future. While bankruptcy may not be the first option for everyone, it can be a formidable tool for those facing overwhelming debt.

In this blog post, we'll explore various options for managing debt and discuss why bankruptcy might be a viable solution for some individuals.

1. Evaluate Your Financial Situation

Before diving into the specifics of bankruptcy, it's essential to assess your financial situation thoroughly. Calculate your total debt, review your income, and analyze your expenses. Understanding the extent of your financial difficulties is the initial step towards finding the proper solution.

2. Create a Budget and Debt Repayment Plan

For many people, a structured budget and debt repayment plan are effective ways to tackle debt. Prioritize high-interest debts and explore strategies like the debt avalanche or the debt snowball method. Consistent payments can gradually reduce your debt burden.

3. Explore Debt Consolidation

Debt consolidation can simplify your debt management. You can reduce monthly payments and save on interest by combining high-interest debts into a single, lower-interest loan or credit card. Options include balance transfer credit cards, personal loans, or home equity loans.

4. Consider Credit Counseling

Nonprofit credit counseling agencies can provide valuable assistance. They may negotiate with creditors to lower interest rates and set up a Debt Management Plan (DMP) to streamline your payments.

5. Be Cautious with Debt Settlement

Debt settlement requires negotiating with creditors to reach an agreement on debts for less than the entire owed amount. While it can be viable, it should be approached with care due to potential credit score implications.

Debt settlement or debt consolidation plans can also have some serious shortcomings. For example, debt settlement companies will not be able to represent you in court if one of your creditors refuses to participate in the plan and files a lawsuit. This can throw your plan and budget out of whack since the credit filing suit will have to take priority in your plan since failing to do so could result in a judgment and subsequent wage garnishment, bank account garnishment, or levy against your vehicle.

The exact amount of time and money required to complete your debt settlement or debt consolidation plan is also unclear since the company can't tell you upfront what each creditor will accept as far as debt reduction and monthly terms.

Finally, many creditors will either refuse to participate in the consolidation plan, or the debt settlement company may not offer assistance with certain types of debt. These typically include medical debt, personal loans, tax debt, post-judgment debt, etc.

6. The Role of Bankruptcy in Debt Relief

Bankruptcy is a legal process designed to provide a fresh start to individuals overwhelmed by debt. While it may not be suitable for everyone, it can offer significant benefits, including:

  • Chapter 7 Bankruptcy

Debt Discharge: Chapter 7 bankruptcy allows for the discharge of certain unsecured debts, such as credit card debt and medical bills, providing relief from the financial burden.

Faster Resolution: This form of bankruptcy typically offers a quicker resolution, often within a few months.

Exemption Protection: Many states offer exemptions that protect certain assets, such as your primary residence (homestead exemption), making it possible to retain important property.

  • Chapter 13 Bankruptcy

Debt Repayment Plan: Chapter 13 bankruptcy sets up a structured payment plan over three to five years, which can make managing your debts more manageable. Most Ch. 13 plans provide 75% - 90% debt reductions.

In other words, most CH. 13 plans result in you paying back anywhere from 5% - 25% of your total debt. This depends on your circumstances, and a seasoned bankruptcy attorney can help you determine your approximate repayment amount.

Asset Protection: It allows you to protect assets that may not be covered by exemptions under Chapter 7.

Income Tax Debt: For many people, Ch. 13 is the best way to resolve their income tax debt. Ch. 13 bankruptcy reorganization plans can discharge income tax debt (if it is more than three years old and meets other criteria) or force the IRS to accept a payment plan of up to 5 years to repay any non-dischargeable tax debt without accruing additional fines, penalties, or interest.

Cram Down: Ch. 13 reorganizations allow filers to refinance their vehicles and lower the principal balance to the vehicle's current market value, spread the payments out over up to 5 years, and even reduce the interest rate. However, there is a requirement that the loan was taken out at least 910 days prior to the filing of the bankruptcy to take advantage of this option.

7. Seek Professional Guidance

Navigating bankruptcy can be complex, and the decision to file should not be taken lightly. Reaching out to a bankruptcy attorney can help you understand the process, eligibility requirements, and potential consequences. They can also guide you on whether bankruptcy is the right option for your specific situation.

Schedule an Initial Consultation With Our Experienced Bankruptcy Lawyers at Fleysher Law

Schedule an initial consultation with our experienced bankruptcy lawyers at Fleysher Law

When facing overwhelming debt, it's crucial to explore all possible choices and choose the one that aligns most effectively with your financial goals and circumstances. While bankruptcy is not the ideal solution for everyone, it can be a valuable instrument for those in dire financial straits, offering a chance at a fresh start and relief from the burden of insurmountable debt.

Schedule a consultation with our accomplished bankruptcy lawyers at Fleysher Law. We will help determine the right path for you and ensure that you navigate the process successfully. Remember, seeking professional advice can significantly impact your journey toward financial recovery and stability.

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