Debt relief, aka debt management, programs offer to reduce what you owe on your debts, making it more affordable to become debt free. The way it works is, they determine amount for you to pay to them each month. They compile that money until there is enough for them to make a settlement offer to one of your credit cards. If the credit card accepts the offer, the account is paid, and money is again compiled until there is enough to make an offer on another credit card. While you are in the program, monthly payments are not being made to your creditors.

Here's the problems with these programs:

  • The credit card companies do not have to agree to settlement offers.
  • Interest and penalties continue to accrue while in the program.
  • Negative marks hit your credit report each month for each bill you are not paying, creating a significant negative credit history. It takes years to recover from this history.
  • You will have to pay tax on whatever portion of your credit card balances that is being forgiven.
  • The credit card companies often continue to harass you for non-payment. They may also sue you, leading to wage garnishments.
  • These programs are extremely expensive compared to bankruptcy.
  • Most people do not make it through a debt relief program due to continued creditor harassment and lawsuits.

Here's why Bankruptcy tends to be the better choice:

  • If you qualify for Chapter 7, you pay nothing to the creditors. If you file a Chapter 13, the amount you will be required to pay is typically much less than that required in a debt relief program.
  • In Bankruptcy, the creditors only get what the court determines you can afford to pay. There is no negotiation with the creditors. In a Chapter 7, the amount you pay is $0. In a Chapter 13, the monthly payment is determined primarily by your amount of disposable income.
  • The negative hits on your creditor report stop once a Bankruptcy is filed.
  • In a Chapter 13, the balances on your debts are set as of the date your case is filed. There is no more interest or late fees. Therefore, any amount you are required to pay goes directly to the principal owed.
  • Recovery from Bankruptcy is much quicker these days than it has ever been. For instance, with a Chapter 7, which typically lasts about 3 months, you will instantly receive credit card offers once your case is complete. Also, you can buy a car right out of Bankruptcy. When it comes to buying a house, you can qualify for a mortgage 2 to 4 years after a Chapter 7, depending on the type of financing you obtain. With a Chapter 13, you can actually buy a house and car while still in Bankruptcy.
  • Debt relief programs tend to only help with credit cards and certain loans. Bankruptcy can help with all types of debt, including: Medical debt, certain taxes, foreclosure and repossession deficiencies, utility bills, leases, and any other type of financial obligation.
  • Bankruptcy can be used to cancel contracts without termination fees, including cell phone, cable, subscriptions and leases.
  • Overall, Bankruptcy is a much more affordable, less stressful, less damaging option than debt relief programs.