Consolidate Debt Or File Bankruptcy
Options for eliminating personal credit card liability span a broad range of possibilities. Finding the best solution requires a degree of flexibility. Consider both the advantages and disadvantages of all options before drawing conclusions. By adopting a systematic approach for comparison, the most logical and profitable solution will emerge.
Bankruptcy provides a harsh solution for dealing with credit card accounts. In some cases, filing bankruptcy is the best option. Individuals may file Chapter 7, Chapter 13 or Chapter 11. In practice, filing Chapter 11 is so expensive that the cost of completing a case is prohibitive. In most situations, individuals file Chapter 7 or Chapter 13. Both chapters allow debtors to discharge liabilities upon the completion of a case yet the requirements for discharge under each chapter are unique.
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Chapter 7 bankruptcy cases may last as little as four or five months. No payments are required, yet debtors may choose to keep a specific item of property used as collateral if bring payments on the secured loan. A Chapter 7 discharge eliminates all types of liabilities unless a special exception applies.
Chapter 13 cases last from three to five years and require that debtors pay a percentage of all outstanding liabilities. In these cases, debtors must limit spending to a monthly budget approved by the court. All remaining monthly disposable income is paid into a plan for the benefit of creditors. At the end of the plan, remaining liabilities are discharged and do not require further payment.
Both Chapter 7 and Chapter 13 remain on a debtor's credit report for up to 10 years. The impact of a reference to bankruptcy in credit reports is often devastating to FICO scores. Filing bankruptcy also limits job availability and increases insurance costs for 10 years.
Debt consolidation plans do not require filing a federal lawsuit. The impact of enrolling in a plan also has a less sever impact on credit ratings. In most cases, banks collect a greater portion of outstanding credit card balances through voluntary settlement agreements. Because of the more favorable result, banks tend to offer substantial discounts when debtors experience sever financial setbacks. The alternative, from the perspective of a banker, is to wait for a notice of bankruptcy and perhaps receive a few pennies on the dollar.
In conclusion, debt consolidation plans provide many of the benefits of filing Chapter 13 but do not have the same disadvantages. Filing bankruptcy is a solution of last resort that is best reserved for debtors who have little income or incur massive debts beyond personal control.
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