Understanding Bankruptcy and Debt

The economic impact of the pandemic has led to an increase in Americans filing for Chapter 7 bankruptcy, so it’s no surprise that Upsolve, a non-profit that offers a free bankruptcy filing service, has seen a corresponding increase in clients. Upsolve surveyed them and found that of the 1,269 respondents who filed for bankruptcy between March 28th and April 27th, 22% reported their main motivator was lost income as a result of the coronavirus.

When could it make sense to consider bankruptcy? Understanding bankruptcy and debt can seem tricky, so let’s take a closer look at how it works. Then, you can make a more informed decision about how to best handle your specific situation. *

What to expect from bankruptcy

Bankruptcy is a legal process that can help you find relief from an overwhelming amount of debt. There are two types of personal bankruptcies, Chapter 7 and Chapter 13. Here’s a brief overview of each one.

Chapter 7 bankruptcy

If you have limited income and are unable to pay back at least some of your debts, Chapter 7 bankruptcy may make sense. Also known as liquidation bankruptcy, Chapter 7 involves selling most or all of your non-exempt property, sometimes including your house, to pay off unsecured debts like credit card debt and medical bills.

Keep in mind that while Chapter 7 may help you achieve a fresh start, it will usually stay on your credit report for up to 10 years. This may make it difficult for you to get approved for a mortgage, car loan, and other types of financing in the following decade.

Chapter 13 bankruptcy

If your income is on the higher side, you may not be eligible for Chapter 7 and have to file for Chapter 13 bankruptcy instead. Chapter 13 is known as “wage earners bankruptcy” and consists of a three to five year repayment plan where you’ll repay all or a portion of your debts. Your unsecured debts will be discharged as soon as the repayment plan is over. Chapter 13 bankruptcy can remain on your credit report for up to 7 years.

You May Like These

Is Your Debt Relief Company Legit?

Debt Consolidation vs Bankruptcy for Debt Problems: Which Is Better?

What is Debt Relief - An Overview

Reasons to consider filing for bankruptcy

There are a number of reasons you may be thinking about bankruptcy and debt at this point in time. Let’s take a closer look at a few of them.

• A layoff, furlough, or termination: If the coronavirus has left you with a layoff, furlough, or termination, you may not be able to make your debt payments and feel you are falling into deeper financial hardship.

• The lack of a predictable financial future: While a stimulus check may help your situation, it’s only a short term solution for a situation that could last months.

• The recession: The coronavirus recession came on quickly but that doesn’t mean it’ll recover quickly. If the whole country is facing an extended recession, having bankruptcy on your credit report may not be such a big concern.

Other ways to handle debt

While bankruptcy (especially Chapter 7) can be a relatively quick way to improve your finances, you should probably look at it as a last resort. Fortunately, there are some alternative ways you can take control of your debt and find relief, even in the midst of the pandemic. Before you decide to file for bankruptcy, consider these options.

DIY

You don’t always have to turn to a professional or company to find relief from debt. The debt avalanche and debt snowball methods of debt management are two DIY debt solutions that can help you. With the debt avalanche, you pay off your high interest debts first so you can save money on interest.

The debt snowball, however, is a plan where you pay off your smaller debts first and roll the amount you used to pay for them into paying off larger ones. If you’re having trouble staying motivated with the debt payoff process, the debt snowball process is probably the better of these two options.

Debt consolidation loan

With a debt consolidation loan, you combine multiple debts into one more manageable payment. If you go this route, you may be able to lock down a lower interest rate which could result in a more affordable payment. You can make a single payment to cover all your debts and streamline your debt payoff journey.

If you tend to overspend, a debt consolidation loan may not be the best solution. Instead, it may enable you to continue to spend freely without much thought. Also, poor credit can prevent you from getting approved for one in the first place.

Credit counseling

If you opt for credit counseling, you’ll work with a credit counselor who will design an affordable monthly payment plan on your behalf. The most noteworthy benefit of credit counseling is that you can secure lower interests rates that your counselor has pre-negotiated with your creditors. Credit counseling can also allow you to enroll in a debt management plan (DMP). During a DMP, you’ll send one monthly payment to the credit counseling agency who will distribute your funds to your creditors.

Debt settlement

The process of debt settlement involves negotiating with your creditors to settle for less than the outstanding balance of your debt and pay off the reduced amount. Although you can do this yourself, a professional debt settlement company can often increase your chance of success.

Here’s how a debt settlement program works: Instead of making payments on your debts, you’ll make a monthly program deposit into an account. As your account balance goes up, the debt settlement company will reach out to your creditors to negotiate lower settlements. If and when your debt settles, you’ll pay a fee that’s usually between 15% and 25% of the enrolled debt. Debt settlement can give you the opportunity to settle your debt in 24 to 48 months and save money in the process.

Contact Freedom Debt Relief for support

Now that you have a better understanding of bankruptcy and debt, know that Freedom Debt Relief is here to help you. We can educate you on your options for dealing with your debt, including our debt relief program. Our Certified Debt Consultants can help you find a solution that will put you on the path to a better financial future. Find out if you qualify right now.

*Disclaimer: Reminder that we are not lawyers or a law firm and we are not offering legal advice. Please speak to a licensed attorney in your area for questions about the law, the legal process or legal steps you should take.

Debt relief stats and trends

We looked at a sample of data from Freedom Debt Relief of people seeking debt relief during May 2024. The data uncovers various trends and statistics about people seeking debt help.

Credit card balances by age group for those seeking debt relief

How do credit card balances vary across different age groups?

In May 2024, people seeking debt relief showed the following trends in their open credit card tradelines and average credit card balances:

• Ages 18-25: Average balance of 7,594 with a monthly payment of 215

• Ages 26-35: Average balance of 10,822 with a monthly payment of 300

• Ages 36-50: Average balance of 14,633 with a monthly payment of 410

• Ages 51-65: Average balance of 15,075 with a monthly payment of 438

• Ages 65+: Average balance of 15,762 with a monthly payment of 419

These figures show that credit card debt can affect anyone, regardless of age. Whether you're just starting out or nearing retirement, managing credit card debt can be challenging.

Support for a Brighter Future

No matter your age, FICO score, or debt level, seeking debt relief can provide the support you need. Take control of your financial future by taking the first step today.