Debts can be debilitating, especially if you owe a large sum and lack the resources to pay them off. Some people would rather not pay their debts. While defaulting can sound like a great idea, your creditors have other options, including suing you. For example, they can sell your debt to an agency that will pursue it aggressively. Threats and harassment are two tactics collection agencies employ to compel debtors to pay. That can disturb your peace. Bankruptcy can be a better option for managing debt. Although declaring bankruptcy has some drawbacks, like decreasing your credit rating, it can eliminate your debt and give you a fresh start. Thus, consulting with an experienced bankruptcy attorney can be helpful if you are drowning in debt and need help deciding what to do.
Defaulting Vs. Filing for Bankruptcy
Most people utilize credit to buy even the most necessities due to the rising cost of living. Others use credit for significant endeavors like starting a business, remodeling or buying a house or a car. Obtaining credit is relatively simple if you have a decent credit score nowadays. Lenders are typically eager to assist as long as you can adhere to the repayment agreement. However, things could change along the way and prevent you from being able to pay your debts as per the agreement. Your life can suffer if you are unable to pay your debts. Your creditors will continue to pursue you for payment. It implies you could be inundated with weekly texts, calls, and emails.
The first thought that comes to mind when drowning in debt is to ignore everything and focus solely on what you can handle. Not attempting to fulfill your financial responsibilities is referred to as "default." It indicates that you have broken your pledge to your creditor to make enough repayments on schedule. Your lender will not be happy and can take legal action against you when they learn that you have defaulted.
The type of payment agreement that each lender enters into with their clients varies. Some companies have a cap on how many skipped repayments you can have before they pursue legal action. This cap could be as low as one late payment or as high as ten late payments. If you exceed that limit, your lender will look for other ways to demand payment. These options are numerous, and one option is selling the debt to a collection company that will employ whatever strategy is necessary to compel payment. Collection companies are known for being unforgiving when it comes to collecting debt. They will call, text, and leave voicemails to annoy and pressure you into making payments.
However, declaring bankruptcy is different because it entails seeking legal assistance to settle your obligations. By declaring bankruptcy, you can obtain help from the legal system to manage your astronomical debt loads. The judge in a bankruptcy court will review your assets and debts and work with you to find a suitable payment method. The judge decides how you will manage your debts once you file for bankruptcy. The judge can determine whether you qualify for a particular type of bankruptcy or whether the court can discharge some of the debts.
Following their financial circumstances and the debt they owe, both people and businesses are permitted under bankruptcy legislation to petition for various bankruptcies. For example, a person's income and debt determine whether to file for Chapter 7 or Chapter 13 bankruptcy. The legislation will determine the kind of bankruptcy you can file. The judge can also evaluate whether you have enough assets to pay the obligation. They will determine which assets you can keep and which the court will need to sell to pay off your debts. You can manage your present bills permanently through bankruptcy.
Generally speaking, defaulting and declaring bankruptcy are closely connected. Some people ignore their bills at first before deciding to declare bankruptcy.
What Ensues When You Default
Defaulting on a debt means failing to pay a debt per the payment terms stipulated in the promissory note you signed with your lender. Sadly, it occurs frequently. Once they realize they are not earning enough money to pay off their debts, some people neglect their financial commitments. But if you want to avoid more issues, there are better courses of action than walking away from debt. This is because doing so results in your creditor taking legal action against you, seriously affecting your financial condition. To recoup their debt, your creditor has several methods, including the following:
Selling Your Debt to a Debt Collection Agency
Debt collection agencies are companies that operate as middlemen between creditors and debtors. They collect past-due customer debts and send the money to the original creditor. Debt collectors employed by collection companies deal directly with lenders. Some debt collectors operate on their own. Your lender has the right to sell your debt to a debt collection agency if you fail to pay it back per the terms of your arrangement. The agency will use any method available to recover the money you owe the client. The agency will not be forgiving because debt collection is typically their sole job.
Filing a Lawsuit Against You
Your lender can bring a civil lawsuit against you to obtain the money you owe them. They will provide evidence in their petition that you received credit from them and broke the terms of the repayment arrangement. The judge will hear the argument before making a final judgment. For example, the judge can permit your creditor to garnish your salary or even place a lien on your home. They can receive any money you gain from selling your home once they put a lien on it.
It Affects Your Credit Rating
Financial institutions and other lenders analyze your credit information or credit score to determine your reliability for timely debt payments. Many people need financial help to buy what they need and want but cannot afford to pay it in cash due to the high cost of living. They obtain it on credit and make monthly payments until the balance is paid in full. However, lenders are selective in who they give credit to. Your credit rating will be taken into account before they decide. Your credit rating is impacted by defaulting. Once you default, a record of it will be kept for up to seven years on your credit history. It can be challenging to obtain credit until you increase your score again.
The sort of credit you have and the amount you owe will determine the action your loan lender will take against you if you default. There are secured debts and unsecured debts. Secured debts are ones that you have obtained using a valued asset as security. Your creditor can seize the asset if you fail to pay a secured debt. For example, you risk losing your car if you walk away from a car loan.
Unsecured debts, like credit card debts, are those you have accrued without providing any form of security. It could be challenging for a debt collection company to compel you to pay if you default on these. But your creditor can still sue you in court to seize your assets or garnish your salary.
What Ensues When You File for Bankruptcy
You can file for bankruptcy if you have fallen behind on your payments and want to prevent your creditor from seizing your assets. The kind of bankruptcy you are eligible for largely determines the bankruptcy filing procedure. You can declare bankruptcy under Chapter 7 or Chapter 13 as an individual.
Chapter 7
It is a liquidation bankruptcy, meaning the court will try to recoup funds from selling your acquisitions to settle your debts. If you do not make enough money to pay off your debts over a given period, you can be eligible for Chapter 7 bankruptcy. The judge will require you to take a means test to determine your eligibility. The judge decides which assets you can keep and which ones the bankruptcy trustee can sell to recoup your debt if you meet the requirements. The court will forgive some unpaid debt. But some debts, like school loans, taxes, alimony, and child support, cannot be discharged.
On the other hand, Chapter 7 bankruptcy can remain on your credit history for up to ten years. It implies that it will affect how easy it will be to obtain credit for that time. The benefit is that after filing for Chapter 7, you can start over with a clean slate and no debts to worry about. If the court discharges them completely, you will not be responsible for your unsecured loans.
After determining your eligibility to petition for bankruptcy, the judge forms a bankruptcy trustee to work with you. The trustee will list every asset you hold except those you can keep. The trustee will subsequently use the proceeds from the sale or liquidation of those assets to settle your non-dischargeable debt.
Chapter 13
Filing for Chapter 13 permits you to retain most of your possessions after showing the potential to pay most of your debts. You will need to develop a repayment strategy that will allow you to pay off your outstanding obligations over three to five years. Your credit history shows a Chapter 13 bankruptcy for seven years. Your credit rating can be impacted at that time. You can reorganize your finances with Chapter 13. You could be eligible if you make enough money to cover your daily expenses and have spare cash to pay off your debts.
Keep in mind that declaring bankruptcy will lower your credit rating. Immediately upon the court's acceptance of your petition, your credit rating will decline. Your future capacity to obtain credit can be impacted by this. If potential employers consider your credit rate when hiring, it could also hinder your ability to find suitable employment. Once a customer files for bankruptcy, credit card issuers nearly universally suspend their credit cards. You can find it challenging to acquire a credit card as a result in the future. However, you can quickly raise your credit rating by making more sensible financial decisions.
To Default or File for Bankruptcy?
When debt becomes unmanageable and burdensome, many people are still trying to figure out what to do. However, the default option and declaring bankruptcy are your two main options. However, you could give yourself some time to see if you can manage some, if not all, of your bills before declaring bankruptcy. You could explore other options, like discussing a loan restructuring with your creditor.
If you have more debt than you can reasonably pay off with your current income, default is unavoidable. That is why the majority of people default first before declaring bankruptcy. By doing that, you also allow yourself sufficient time to improve your financial circumstances. You could stop creditors from seizing your property if you file for bankruptcy after walking away from debt. Additionally, you can defend yourself against pay garnishments, which could result in you earning even less than you do now. You can safeguard what you have and your future by declaring bankruptcy.
Alternative Ways to Manage Debts
There are other options besides bankruptcy to help you deal with your massive debt. Other options could be even more practical for you. Only use bankruptcy as a last resort after trying and failing to use alternative debt management strategies. You can try the following tactics before submitting your bankruptcy petition to the court:
Balance Transfer to Manage Credit Card Debts
When you need to buy something but do not have enough cash to pay for it, credit cards can help. But you still have to deal with credit card debt, which will eventually become too much to handle if you fail to make the payments on time. Some people maintain multiple credit cards from various issuers. Maintaining some cards is less expensive than others. To make your debt more manageable, you could transfer the balance from a costly credit card to a less expensive card. However, using a credit card to transfer balances could affect your credit rating. Later, you can raise your score by lowering your overall credit utilization rate.
Medical Bill Negotiation
Once you recognize that you cannot manage the debt with your current income, you can negotiate for a debt reduction if you owe more on medical debt. You just contact the billing department and explain your financial circumstances. You have the option to ask them to reduce your monthly payment. Fortunately, many hospitals provide discounts and assistance programs in the event of financial difficulty. If you disclose your condition as quickly as possible, you should benefit if you are going through a financial crisis.
If you adhere to the new repayment plan, negotiating for a reduced monthly payment will not affect your credit rate. A smaller monthly payment will also be easier to handle, lowering the possibility of a missed payment.
Debt Consolidation
Additionally, you could apply for debt consolidation to help you repay other debts, particularly credit card debts. These loans provide flexible payback durations lasting up to seven years and lower fixed interest rates. Any high-interest loan you have can be quickly replaced with debt consolidation. These loans are less expensive and simpler to manage because they feature a comparatively low-interest rate.
However, at first, debt consolidation will affect your credit rating. It is because you have to conduct a significant credit search before applying for the loan. But if you make payments on the credit consolidation loan without fail, you can gradually improve and raise your credit rating. After consolidating your debts, you can obtain credit if you have a satisfactory repayment history.
Hardship Options for Student Loans
Remember that not all your debt, including student loans, can be discharged in bankruptcy. You must discover another approach if your bills are too much to handle. You have the option of forbearance or deferment if you have a federal student loan. Now, forbearance is automatically in effect for all federal student loans. It implies that you can obtain relief without interest accumulation if you pursue forbearance. Forbearance, fortunately, will not lower your credit rate, but it will appear on your credit record.
Find a Skilled San Diego Bankruptcy Attorney Near Me
It could be challenging to remain rational and formulate an effective debt management strategy when your debt load becomes unmanageable. Because of this, you require the assistance of a knowledgeable attorney to explain your alternatives to you. It is advised to swiftly make a better choice that will save your possessions and future if you have already defaulted.
At San Diego Bankruptcy Attorney, we can help you navigate this trying time, offer advice and support, and fight for a just resolution to your case. We thoroughly understand the bankruptcy procedure and can assist you in selecting the bankruptcy type that best suits your circumstances. If you need assistance or have questions regarding defaulting and filing for bankruptcy in San Diego, contact us at 619-488-6168.
