Debt Relief v. Bankruptcy

An overabundance of debts may be leading you to think about declaring personal bankruptcy. While that is one option, there are other ways to reduce your overall debt load and secure permanent debt relief.

Debts can be secured or unsecured. Secured debts are those that are "backed" by the value of the asset being purchased. Homes and cars are typically considered secured debts. Other similar purchases, like vacation homes, boats and recreational vehicles, would also fall into this category. If for some reason, you can no longer make the payments on these assets, you can sell the asset to repay the loan. You could also find another purchaser willing to take over the payments on the asset. Finally, you could return the asset to the creditor and allow the creditor to liquidate it to settle the debt.

Other debts, like credit card bills, utility bills (in most cases), medical bills, and personal loans are considered unsecured. The borrower has offered no collateral to back up his promise of repayment. Instead, the creditor has accepted the borrower's promise to repay in exchange for the loan. Unsecured debts typically have higher interest rates and shorter repayment terms than secured loans. They are also "unprotected" in bankruptcy proceedings, and are often discharged as a complete or near-complete loss by the creditor.

Student loans represent a special kind of debt. While the debt itself is unsecured, there are stiff penalties for failing to repay student loans. Bankruptcy proceedings do not discharge these loans. The law does provide a mechanism to discharge student loans, but the process is long and difficult, and the success rate is extremely low.

If you have less than $10,000 in unsecured debts, your best bet is to work out a payment plan that will discharge your debts in the space of about 3 years. Enroll in credit counseling and take advantage of debt reduction workshops and budgeting courses to help put your debt back into proportion with your income.

If you have more than $10,000 in unsecured debts, you may benefit from a combination of credit counseling and financial education programs, and some type of negotiated debt settlement. Much of your final strategy will depend upon your overall debt load, the stability of your income, and your plans for the next 3-5 years.

If your unsecured debts exceed $25,000, debt settlement should be a cornerstone of your approach to reducing your obligations. You may not be able to discharge all of your debts, but in working with your creditors, you may significantly reduce the balance you owe.

Filing for bankruptcy should be a last option. This strategy should be reserved for individuals who have no viable income, no prospects for meaningful income in the future, and who have significant unsecured debts that cannot be negotiated, settled or discharged in any other way.