Which Is Better - Debt Relief Programs or Bankruptcy?

When clients first come in to see us, the overwhelming characteristic that is common to most people is stress. They are usually worried sick about their finances and are frustrated because they haven’t been able to take care of it without resorting to outside help. What’s unfortunate is that sometimes we see clients that have tried alternate methods to deal with their debts and this has made their situation worse rather than better. In many cases, bankruptcy would have been the better option to start with.

“Debt relief programs” advertise heavily as able to help you get debt free, but often what can result is that you’ll be in even more debt than you are at present. Some debt relief programs are for-profit enterprises whose goal is to take care of their own bottom line and that will be what’s most important to them. They charge anywhere from several hundred to several thousands of dollars in fees for their services and may (or may not) be able to get you worthwhile results – particularly for the steep price you’re paying.

Services Offered

There are two main services these firms offer to consumers who are past due on their debts – debt settlement and debt consolidation. What these firms do is to try and negotiate with your creditors to get you lower interest rates, lower monthly payments or a negotiated settlement. Debt settlements are set up where you offer to pay off a certain percent of the debt owed. If you can pay cash at the time, you will likely get a better deal. If the company has to wait to get paid, they will likely want more of what you owe them.

With negotiated payments and settlements, you pay the debt agency and they pass the payments on to your creditors. With debt consolidation, the agency will take all of your debts and combine them into a payment plan over a period of time – usually three years – and you make payments to the agency and they turn around and dole out the proportionate amounts to your creditors. Depending on the agency you choose and your circumstances, this can be helpful.

When the Services Become a Problem

Most debt agencies charge a fee for their services. If the company is for-profit, this can mean many thousands of dollars. If you’re already struggling to afford your payments, even with lower negotiated interest rates, you’ll likely be paying out more because of the fees. If you truly want to explore this option, you’ll want to look for a non-profit that charges low fees.

If your debt agency has a poor reputation and doesn’t do what they promised or doesn’t negotiate successfully on your behalf, you may be stuck with poor results. If you truly want to explore this option, you’ll want to check out several agencies and only choose one that has tons of positive customer reviews, a good reputation and no complaints lodged against them.

You should also note that when you work with a debt relief agency, this doesn’t go unnoticed on your credit report. It will become part of your file and will lower your FICO score because it’s an indication that you are in trouble and in over your head with your credit.

The Pros and Cons of Debt Relief versus Bankruptcy

The ads put out by debt relief agencies promise to “erase” your debts, to get collections efforts to stop for good and to get negative items removed from your credit report. These things are not easily done and it’s likely they are overestimating what they can do for you (or outright lying) and will simply take your money and leave you worse off.

If you are in too deep with your debts, bankruptcy may be a better option for you than a debt relief program. Here’s what to consider – if you are behind on your debts because of a situation that will likely not reverse (or won’t for a time) such as unemployment, disability or failure of your small business you may struggle to stick with a payment plan. Instead, if your debts are starkly out of proportion with your income or assets, bankruptcy may be a better option.

How do you know what’s best? Contact a reputable North Carolina bankruptcy attorney like John Orcutt. At your free consultation he will look at your income, debts and assets and tell you if you are an appropriate candidate for chapter 13 or a chapter 7 or if he thinks your debts can be better managed outside of a bankruptcy. The appointment is free – the advice is free and the results can be life changing.