Debt Negotiation vs. Bankruptcy

The biggest problem with overwhelming debt is not knowing how to get out of it. Many times it can seem like you have few options and that the situation is hopeless. Although many people know of the bankruptcy option, many fear it because of common misconceptions associated with it. Options outside of bankruptcy include direct debt negotiations with the creditor, which also has its own stigma. So how do you know which is best for you?

Money Matters

Since each person’s financial situation is unique to them, it is best to evaluate which option to choose by looking at your financial standing. Determine your current debt load, or the total of what you owe creditors. This includes everything from past due utility bills, medical bills, credit cards, car loans and a mortgage.

Next, evaluate your monthly budget of expenses. This refers to how much you pay each month for essential daily living expenses such as food, utilities, housing, gas, car, etc. Then evaluate your monthly income after taxes against your essential living expenses. Do you have any left over? If so, do you have enough to  make minimum payments on all of your debt accounts, excluding your mortgage and car. (These are excluded because they are considered essential living expenses.)

If you earn enough money to make at least minimum payments on your debt accounts, you are a good candidate for direct debt negotiation. The idea would be to contact your creditors and inform them of your financial situation and negotiate a deal to lower or suspend your interest rate while you pay as much as you can towards your payments.

If you do not earn enough to make at least minimum payments on all of your accounts, meaning at least one or two of your accounts would continue to go unpaid, you may be a good candidate for bankruptcy.  Bankruptcy can help you negotiate a better repayment schedule through Chapter 13 or obtain a reduction in some of your overall debt burden through Chapter 7.