Dealing with Debt is More Common Than You Think

You are not alone; many individuals have debt and question how they will pay things off. And while many think they are alone, most people have debt and a significant percentage of those struggle about how to deal with it. Debt is just one of those topics that most people do not want to talk about. But, the average American has $90,460 in debt, according to a 2021 CNBC report. That included all types of debt categories, including credit cards, personal loans, mortgages and student debt.

In the third quarter of 2021, the total household debt increased by $286 billion (1.9%) to $15.24 trillion. Auto loans increased by $28 billion. With wages staying the same, inflation rising and the cost of goods soaring, it is completely understandable that you are feeling the pinch. If you are struggling to make payments or only make minimums, it is worth looking at your options.

You Have Options

If you are only paying minimums or behind on your debts, reviewing your options is important. You have many options for dealing with your debt. The three most common ways people deal with debt, outside just paying it off through regular monthly payments are: debt consolidation, debt settlement, and bankruptcy. While the first two options are usually handled privately, bankruptcy is a financial and legal option that helps many individuals through the federal courts. Every year, there are more than 500,000 individuals who file bankruptcy. These numbers do not include people who ignore their debt or handle their debt through debt consolidate or debt settlement. 

Debt Consolidation

Debt consolidation is the most straight forward way to handle debt. It takes some or all of your open accounts and consolidates them into one loan. This often done to lower payments and/or interest rates. The result is being able to have a plan and structure to pay down the debt in a clear manner. This can be the most difficult option since it requires being qualified for a loan for the full amount of the debt. If your income and/or credit is low, it may not be a viable option.  This option always relies on you not incurring more debt while paying off the consolidation loan; last thing you want to do is pay off your credit cards with a loan and then put more on them.

Debt Settlement

Debt settlement is a very popular process. This basically is the process of negotiating with creditors for a lesser amount. Some individuals handle debt settlement themselves, while many hire specific companies to handle the negotiation and payments. With debt settlement companies take on a debt settlement case, they set the individual up on a payment plan based on anticipated debt settlement amounts and fees. The funds are held in an escrow account by the company. Settlements are negotiated once there is enough funds in the account, since the best settlement terms are when there is a lump sum payment.

There are many factors to consider with the debt settlement option:

1. Your credit can be impacted.

If you’re not already delinquent on your accounts, you will be once you divert debt payments toward the settlement account. Delinquent accounts and debt charged off can stay on your credit for years. If you are already behind on your accounts, the settlements can help your credit improve.

2. You have to pay a fee when a debt settles.

By law, these companies can’t charge you upfront fees. Most of them charge a percentage of each debt they settle, based on that debt’s balance when you enrolled it in the program. Some charge a percentage of the debt eliminated by the settlement.

3. Forgiven debt may be taxable.

You should also be aware that the Internal Revenue Service generally regards forgiven debt as income. When you settle an account for less than the full value, the creditor will report this as a loss. The result is that the creditor issues a 1099-C (Cancellation of Debt). This usually be result in higher taxable income. For example, if you settle a $5,000.00 debt for $3,000.00, then you would receive a $2,000.00 1099-C. This means your taxable income likely will be increased by $2,000.00. NOTE: There are some exceptions for insolvency and bankruptcy to this rule. 

5. There’s no guarantee of success.

When a debt is settled and everything goes as planned, the process works. However, there’s no guarantee that the debt settlement company can resolve your debt for low enough amount to make it worth it. Additionally, if a creditor settles for more than anticipated, then it can impact your ability to timely settle with other creditors. 


Bankruptcy provides a solution by giving people a court regulated process to manage their debts. There are various types of bankruptcy, but the most common are Chapter 7 and Chapter 13.

Chapter 7

Chapter 7 is also called a liquation. In exchange for wiping out qualifying debt, you must agree that the trustee can take and liquidate/sell some of your property to pay back debt. However, you can keep exempt/protected property. What you can keep can vary from state to state. Here in Virginia, the laws are fairly generous. Our biggest issue usually comes with equity in homes.

Chapter 13

Chapter 13 is also called a wage-earn plan. This is a three-to-five year plan where payments are based on various factors, including income, assets, debts, expenses, etc. In a Chapter 13, you can keep all of your property, but you must pay creditors the value of any nonexempt assets. This is often a good option for those who have assets who are at risk in a Chapter 7.

Other Types of Bankruptcy

There are also two other chapters of bankruptcy some people consider: Chapter 12 and Chapter 11. Chapter 12 is for farmers and fishermen. Congress specifically designed this chapter of bankruptcy to deal with these two industries because they are often season and run by many smaller operations. Chapter 11 is for business or individuals with very high debt. Most commonly, when large corporations file bankruptcy, they file Chapter 11. Some of the most well-known Chapter 11 bankruptcies are: Toys R Us, General Motors, Lord & Taylor, Michael Vick, and Curtis “50 Cent” Jackson. Chapter 11 is often filed by individuals with trying to restructure who do not qualify for a Chapter 13 due to debt levels. The debt levels change every three years, but as of January 2022, the debt levels are: unsecured debt: $419,275 and secured debt limit: $1,257,850.

You can get credit again

The idea that a bankruptcy filing remains on your credit reports for up to 10 years scares many people. But credit scores can start to recover almost immediately after you file. Some people even see an immediate uptake in their credit if they are already delinquent on various accounts. Bankruptcy does not prevent home ownership for long. It’s possible to get a VA or FHA mortgage two years after a bankruptcy. Most conventional mortgage loan programs require you to wait at least three years.

For things like credit cards and car loans, you are able to open those accounts immediately after bankruptcy. But, the interest rate may be on the higher side. The good news is the more time passes after your bankruptcy, the higher your credit will go. Taking affirmative steps to improve your credit will also speed up the process. Doing certain things like opening up a secured credit card or seeking out a credit builder loan will put new positive accounts on your credit, which will carry a lot of weight to improve your credit quickly.

Bankruptcy may not be the right option for you, but often it is a better option. An experienced bankruptcy attorney will be able to determine if someone qualifies for bankruptcy and if there are any risks. Ashley F. Morgan Law, PC, like many bankruptcy attorneys, offer free consultations for debt issues. Educating your self on all your options is the best way to make an educated decision on how to deal with your debt.

Attorney Ashley F. Morgan is a Virginia licensed attorney. She has been helping clients manage their debts for most of her career; her primary focus in practice is bankruptcy and debt issues. It is important to her that she educates her client and help them make the best decision for their circumstances.