When credit card debts become so unmanageable that you are unable to make payments or seem to be going nowhere with your payments, the word "bankruptcy" may come to mind. In Tennessee as well as across America, many consumers who are struggling with high credit card debts are also considering bankruptcy, which can certainly provide a fresh financial start, but it has long-term financial implications. The good news is, for consumers like you who are overburdened with high-interest credit card debts and looking for relief, there are other debt relief options available - including debt consolidation through credit counseling and debt settlement.
Debt consolidation, or a debt management plan (DMP), allows many consumers to combine, or consolidate, debts spread across multiple credit cards as well as unsecured debts (like medical bills, utilities, or department store charges) into a single, more manageable, and more structured payment plan made to a credit counseling agency. In contrast, debt settlement allows consumers to negotiate or settle with individual creditors for a substantially reduced amount than what they originally owe. Today, in these tough economic times, many consumers have made both debt consolidation and debt settlement popular alternatives to bankruptcy - which can provide debt relief, but has a more damaging and longer-lasting impact on one's credit.
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How Does Bankruptcy Work?
Bankruptcy generally allows borrowers with credit card debts far exceeding means of repayment to become forgiven, their debts to be lessened or discharged, and gives many individuals a new lease on life. The three common types are: Chapter 7, Chapter 11, and Chapter 13.
Chapter 7 is also known as total bankruptcy or liquidation, meaning, a consumer will typically have to surrender all property. While some property will be immune from this rule (called exemptions), exemption laws vary by state so it is important to consult Tennessee laws to determine which types of property are affected. Chapter 11 is usually referred to as reorganized bankruptcy. According to the United States Federal Courts, this type of bankruptcy is most commonly used by a company or organization that still wants to stay in business, but is facing financial hardship. In this case it can continue operation, but must pay creditors according to a debt reorganization plan created by the court. Finally, Chapter 13 bankruptcy is called debt adjustment. An individual would typically file for this type if they would like legal relief from debts, and are willing to file a formal plan to pay some or all of their debts from their current income.
As noted earlier, bankruptcy can provide many consumers with a clean slate; however, it typically has damaging and long lasting effects on one's credit. Bankruptcy generally stays on one's credit report for up to 10 years, and can make it difficult for many consumers to obtain credit for home, auto, and other purchases. For these reasons and more, bankruptcy is generally considered the option of last resort. That's why it's smart to explore your other debt relief options that can also get you on a path towards paying off your debts - without the devastating effects that bankruptcy cause on your credit.
Benefits of Consolidating Debts
As noted earlier, many consumers like you who are struggling with credit card debts, as well as other types of unsecured debts (such as medical bills, department store charges, or utilities) have debt relief options available other than bankruptcy. As noted earlier, one viable option is debt consolidation, or a debt management plan (DMP). The goal of debt consolidation is to provide consumers a single, more manageable, and more structured payment plan made to a credit counseling agency. Here's how it works:
Typically, credit counselors coordinate a debt management plan that allows consumers to make one, consolidated payment each month. After careful analysis of your outstanding debts and ability to pay off those debts, they submit proposals to your creditors, on your behalf, requesting reduced interest rates, or the waiving of any late fees and penalties. Creditors that agree to those proposals are then placed into the debt management plan or DMP.
With a new, more affordable and more structured repayment plan in place, you can, ideally, direct more of your payment towards paying off the principal balance on your credit cards versus just the interest.
Debt Settlement Alternative
Another proven debt relief option for many consumers is debt settlement. Unlike debt consolidation where you pay all of your debts, just at lower interest rates - with debt settlement, you are hoping to settle for substantially less than what you owed. However, as the term "settlement" suggests, creditors are certainly not legally required to accept the settlement proposal. Many consumers are typically advised to stop paying their credit card in order to save up funds, over an extended period, that they can later use to offer a reasonable settlement offer to creditors. In this scenario, creditors may threaten to sue consumers who default on the terms of their credit card agreement. Plus, those who default on the terms of their credit card agreement may see their credit scores decline.
However, in spite of the risk of getting sued or the impact to their credit score, many consumers still consider debt settlement a popular alternative to bankruptcy - which, as mentioned earlier, can have a more devastating and longer lasting effect on personal credit.
That's why it is a smart plan to explore and compare all your debt relief options - including debt consolidation and debt settlement - and find out which option is right for you, can help you manage your debts, and can get you on a path to becoming debt free. Find out how debt relief can help you by requesting a free debt relief analysis and savings estimate, at no obligation to you. Start today - it only takes minutes to complete!