Your business has had a few down years and the debt is stacking up. The bills for your surgery are astronomical, the car just died, and your credit card debt is getting out of control. For many, these situations are a reality and can be suffocating.
The amount of debt for the average American household is $135,065. This debt can come from multiple sources: credit cards, mortgages, auto loans and car loans. With the average American household pulling in just over $60,000 per year, it seems that many people are living above their means.
The question is: What are the options to relieve my debt?
The two most-used paths to get out from under debt are bankruptcy and debt consolidation. Here’s a rundown of these two:
Bankruptcy allows individuals two separate options: Chapter 7 or Chapter 13.
Chapter 7 or liquidation bankruptcy, provides the option to sell your nonexempt assets through a court-appointed trustee or hand them over to creditors to cover your debt. To qualify for Chapter 7, you must complete six months of credit counseling and a post-bankruptcy debt education class. The following must also apply:
- Based on your family size, your monthly household income must be lower than the median state income
- Your extra or disposable income cannot cover your debt obligations
Chapter 13 bankruptcy includes a court-approved repayment plan that gives the borrower a three to five-year timeframe to pay off their debt free from creditor harassment. If all payments are made under the approved repayment plan, all remaining debt will be removed.
To qualify for Chapter 13, you must also complete six months of credit counseling and a post-bankruptcy debt education class. The following must also apply to your situation:
- Secured debt such as mortgages and auto loans, cannot total more than $1,184,200
- Unsecured debt such as credit card debt and medical bills cannot total more than 394,725
A downside of bankruptcy is that most student loans, tax debt situations, child support, alimony and crime-related debts cannot be discharged.
Debts that qualify for relief through bankruptcy Chapter 7 and Chapter 13
Chapter 7: Credit cards, personal loans, medical bills, utility bills, payday loans, bills in collection, lease and contract debt and promissory notes.
Chapter 13: Credit cards, medical bills, utility bills, payday loans, student loans, taxes and bills in collection.
Debt consolidation is a borrowed loan used to pay off numerous debts you may have. The benefit of taking this route is that you would only have to manage one balance with a lower interest rate and a single monthly payment.
To qualify for debt consolidation, you must have a credit score of at least 600. According to Forbes, 90% of top lenders use your FICO score. Also, your debt to income ratio, meaning your monthly debt payments in accordance with your total monthly income, must be below 40%. The final qualification for debt consolidation is no recent bankruptcies.
Debts that qualify for relief through consolidation: credit card bills, medical and utility bills, student and payday loans or bills in collection.
Weighing Both Options
If you choose debt consolidation, expect an initial drop to your score due to a hard inquiry performed on your credit report. If you miss payments, you may end up back where you started.
Bankruptcy can cause your credit score to drop and a while to recover. When considering your options for debt relief, do a deep dive to find out exactly what you’re getting yourself into. There are many options out there and everyone’s debt situation is different.