If you are struggling with debt and considering your options for managing your payment plans, you have likely come across the terms debt restructuring and bankruptcy. Although they are both ways of dealing with debt, bankruptcy and debt restructuring are vastly different. Before you decide how to move forward with your debt resolution plan, you must understand the differences between these two processes.
Debt restructuring is a valuable option for people or businesses struggling to make debt payments on time but who want to avoid filing for bankruptcy. The process can help you avoid defaulting on your debt and make it easier to get your finances in order again. Debt restructuring involves working with your creditors to create a new repayment plan if you cannot keep up with the current plan. This option allows you to settle financial issues out of court and is typically less expensive than filing for bankruptcy. Your credit score can be negatively impacted if you stop making payments as you work to restructure your debt or if you are restructuring after bankruptcy. It is important to note that creditors may not be willing to work with you to create a new payment plan and maintain the right to deny a debt restructuring request.
Bankruptcy is a legal process that allows you to discharge a portion or the entirety of your debt. Although this may sound appealing, bankruptcy has significant financial impacts, including negatively affecting your credit score for many years, and should only be done as a last resort. There are many kinds of bankruptcies, but the two that the average person would be most likely to deal with are Chapter 7 and Chapter 13 bankruptcies. Chapter 7 focuses on removing unsecured debt such as credit cards, personal loans, and medical bills. In contrast, Chapter 13 allows you to catch up on secured debts like your home or car while discharging your unsecured debt. Because bankruptcy is handled in court, it is more expensive than debt restructuring, but having legal aid to help you navigate the complex channels of bankruptcy law is extremely valuable and improves your odds of a favorable outcome.
Financial law is exceptionally complex, and if you find yourself in financial trouble, it is always best to seek legal aid from a skilled attorney who can guide you through the appropriate legal channels to get your finances back in order.