Should We Have Declared Bankruptcy Instead of Paying Off $109,000 of Debt?

by Travis Pizel · 40 comments

On January 31st, I made my final payment to my debt management plan. In 55 months, my wife and I eliminated $109,000 of credit card debt.

To say we are ecstatic would be an understatement.

Over the last four and a half years, it’s been suggested more than once that we took the wrong path to eliminate our debt. I’ve been told that bankruptcy would’ve been a far better choice. So, I decided to put our debt management plan and bankruptcy into a head-to-head debt relief battle, and see which option comes out on top.

Debt Management Program

During our initial consultations with our debt relief provider, we did the following:

  • Provided a list of our creditors and balances
  • Created a monthly budget to see how much we’d have available for a monthly payment
  • Determined whether a debt management program was affordable, or if we needed to use a different debt relief option

Once we decided to go forward, each creditor was notified of our enrollment and was sent a proposal for a monthly payment and reduced interest rate. These terms would result in our debt being paid in full in five years. We had two creditors reject the proposal, because they wanted a slightly higher monthly payment. An updated proposal was sent, and within six weeks, all our creditors were on board.

We made 54 payments of $2,489, and one final payment of $3,992 for a total of $138,398. The breakdown of our payments looks like this:

  • Debt repaid: $109,000
  • Administration fees: $2,750
  • Interest: $26,648

Chapter 7 Bankruptcy

With Chapter 7 bankruptcy, a debtor’s assets are liquidated, and the proceeds are used to pay the creditors. The rest of the debt is discharged, and the debtor is given a fresh financial start.

To qualify for Chapter 7, the debtor’s income must be below the median income in the state which they reside. If the debtor’s income is above the median, they must pass a strict means test to prove they’re unable to pay back their debt. Since our income exceeded the median for our state, and we wouldn’t have passed the means test, we wouldn’t have qualified for this.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a rehabilitation of a debtor’s finances through a regular payment plan that repays part or all of the debt. People filing for this type of bankruptcy must have regular income and show that they’re able to make consistent payments towards their debt.

This is the bankruptcy path we would’ve had to pursue.

Once we filed the bankruptcy petition, the following things would’ve occurred:

  • A 341 meeting (meeting of the creditors) to verify all the information on the bankruptcy petition, such as our income and debts
  • The creation of a detailed, judge-approved budget to determine how much discretionary funds we’d have available each month to pay our creditors

Because our income is above the state’s median, our repayment plan would’ve been 60 months (as opposed to 36 months for people whose income falls below it). I can’t say whether we would’ve been required to pay back all of our debt or not.

However, if we’d been ordered by the court to pay back every penny, we would’ve made an estimated $112,000 in payments, broken down like this:

  • Debt repaid: $109,000
  • Estimated bankruptcy lawyer fees: $3,000
  • Interest: $0

Head-to-Head Comparison

  • Length: The length of our debt management program was 55 months vs. the court-mandated 60 months for Chapter 13 bankruptcy.
  • Amount paid: Even if we would’ve paid back 100% of our debt through Chapter 13, we would’ve paid more than $26,000 less out of pocket — because, according to Minnesota state law, no interest can accrue on credit card debt during bankruptcy repayment.
  • Monthly payments: $2,489 for our debt management program vs. $1,867 if we repaid all our debt through bankruptcy (with 0% interest over 60 months).
  • Income increases: Over the last 55 months, we’ve increased our income significantly through pay raises, my wife picking up an extra job, and my becoming a freelance writer. This extra income went right into our budget and improved our financial breathing room. Had we declared bankruptcy, we would’ve had to inform the court of each income increase — and the judge would decide how much of that income would go to our creditors each month.
  • Vehicle purchase : Our van is nearing the end of its life, but we’re trying to make it last as long as possible. Had it needed replacement during our debt repayment period, purchasing a car while enrolled in a debt management plan is very doable, and borrowers can even qualify for the lowest interest rates. People going through Chapter 13 must find a lender that will extend credit to them, and will likely be offered a higher interest rate.
  • Credit rating: I’m exiting our debt management program with a credit score of 704, and my wife with 740. Bankruptcy can have a severe negative impact on a debtor’s credit rating for years after the repayment period has ended.

The Verdict

Laying out the facts above, it’s harder to pick a clear winner than I thought it would be. Bankruptcy has a very big advantage, because creditors can’t continue to charge interest during bankruptcy repayment, which results in a lower monthly payment.

Enrolling in a debt management program, however, allowed us to maintain much more control of our finances. We had the flexibility to refinance our home, which may save us thousands over the life of our mortgage. We didn’t have to go through the stress of court proceedings and having our monthly budget approved, and we didn’t have to go back to court each time our income changed.

But is that worth $26,000?

A person’s peace of mind is priceless. I’m not saying that going through our debt management program was stress-free, but the thought of having to go through court proceedings many times over the last four and a half years doesn’t sound attractive to me in the least.

I also don’t know whether we would’ve paid back all of our debt through bankruptcy. And it was very important to me that we DID pay back every penny.

We spent the money, and I believed we should repay it if we could. We’ve proved over the last 55 months that we were able to do so.

In my opinion, there’s a place and a need for bankruptcy if a person has come to a point where they absolutely can’t pay their debt. Through our debt management program, we were able to do so without involving legal proceedings. The final decision was difficult, but I still believe we made the right choice.

Do you think I made the right choice? Have you gone through bankruptcy? What was your experience?

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{ 40 comments… read them below or add one }

M Meagher February 6, 2014 at 8:26 am

Congratulations!

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Travis @debtchronicles February 6, 2014 at 5:59 pm

Thanks, M, Meagher….appreciate you stopping by!

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Mike G. February 6, 2014 at 9:18 am

Hey Travis! I totally agree with what you and Vonnie did. As you know, we just finished up our debt management program a few months ago as well, and paid off $46,802 in credit card debt, and I feel the same as you do. We were stupid and borrowed the money, and we paid it all back. I would have felt dirty or something if we had declared bankruptcy. Like you, we aren’t wealthy but make decent money, and while it was tight making that payment every month, there was no reason we couldn’t make it. It’s been fun following along on your journey, and I’m thrilled you guys are finished!

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Travis @debtchronicles February 6, 2014 at 5:52 pm

Thank you, Mike, and congratulations to you for your major accomplishment as well – feels GREAT doesn’t it?!?! The big variable here is whether bankruptcy would have forced us to pay back everything. If not, that wouldn’t have sat well with me….but neither would having our credit being trashed for years past the end of the repayment period. I’m confident I made the right choice for me!

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Joel @ SaveOutsideTheBox February 6, 2014 at 9:21 am

Way to go buddy. I can’t believe you made it happen in 55 months. It really is incredible.

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Travis @debtchronicles February 6, 2014 at 5:53 pm

Thanks, Joel! I remember telling you my story back in October, and even then the end felt so far away. We’re here…and we’re not looking back!

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Charlie @ Our Journey To Zero Debt February 6, 2014 at 9:24 am

Congratulations! Must lift a HUGE burden off your shoulders.

If you spent it, you should be responsible to pay it back. And by finishing the program, you had the means to pay it back.

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Travis @debtchronicles February 6, 2014 at 5:54 pm

That’s what really makes me feel like I made the right decision, Charlie. No need to invoke the legal system and gain the protection of the courts if we can do it ourselves. Thanks for your support!

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Wealth Tortoise February 6, 2014 at 9:33 am

In answer to your question – because you managed to pay off the debt and you’re feeling ‘ecstatic’ then yes you made the right choice. Imagine how you’d feel if you took the (somewhat) easier route, you’d always feel you’d failed or that you still ‘owe’ somebody something, i.e. a debt. You’re fair and square now, at peace with the world, so you can hold your head high and say: I did it! That’s got to be better.

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Travis @debtchronicles February 6, 2014 at 5:58 pm

That’s the thing, Wealth Tortoise….I’m not sure the Bankruptcy route is actually easier. Having to go to court, having our budget approved, going to court with every salary change, ruined credit for years….that doesn’t sound easy at all. There are valid times to use bankruptcy, and I don’t think that those that go through it would say it’s easy at all. But I also think that bankruptcy is abused, and I think that had I used it, it would have been an abuse of it’s intent. Thanks for reading, and your support!

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Matt C. February 6, 2014 at 5:46 pm

You certainly did make the right choice. That peace of mind is priceless. I’m nearing the end of my DMP and am now glad I chose this route instead of trying for bankruptcy. It certainly feels better to know that I worked hard to get back on track. After reading your article, I certainly feel as though I made the right choice. I would (and will!) definitely recommend your article to anyone who has to make the decision.

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Travis @debtchronicles February 6, 2014 at 6:03 pm

Matt, your comment really hit me right >>there<< (hits chest). Comments like yours are the reason I continue to share my story. I'm happy to have helped solidify your decision and wish you success and congratulations on being close to the end. Please do send anyone in those shoes trying to decide which way to turn over this way. Maybe a DMP is the right choice, maybe Bankruptcy would be the right choice. The key is to get all the information so they can make an educated decision. I'd love to hear from you when you complete your DMP so I can celebrate with you!!

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Cat Alford (@BudgetBlonde) February 6, 2014 at 7:35 pm

I really like this comparison, and I have to say that it gives me an immense amount of respect for you and Vonnie. A family member of mine ran into similar trouble and took a different route. Their attitude towards their debt was a bit of a “shrug” and they felt no remorse letting it go and having others pay it for them. The two of you took responsibility for your actions and worked incredibly hard over the past few years. It’s how everyone should act when they have debt and you two are to be commended for all your hard work!

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Travis @debtchronicles February 6, 2014 at 7:44 pm

Thanks for the vote of confidence, Cat. I’m sure there are plenty of people that go through bankruptcy that do take responsibility for their debt, but they have (for one reason or another) gotten so far over their heads that they need the legal proclamation of bankruptcy to get their lives back on track. That’s what it’s for – no one should have to struggle forever. But, it’s people with the shoulder shrug kind of attitude that may not learn from their mistakes because of that lack of responsibility. If the root problem of how a person got into debt is not addressed, the cycle is likely doomed to repeat!

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Brett February 6, 2014 at 8:07 pm

When faced with two choices, the hardest and most difficult choice, is almost always the right choice. That’s why they call it the right thing. Bankruptcy is never a moral choice. It is only a matter of necessity because you have made such bad choices and had such bad luck that you cannot possibly every repay your obligations. The people that choose bankruptcy based on what is best for them should be ashamed of themselves. And all of that pay their bills are very angry and disappointed in them.

You absolutely did the right thing. In fact, you give all of us a valuable and important example to follow. Two thumbs up and thank you for providing an example of what good people are willing to do to honor their commitments.

Honor and integrity is not dead!!!

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Travis Pizel February 6, 2014 at 8:22 pm

Thanks Brett, I couldn’t have summed up my thoughts on bankruptcy, or the root of why we went the route we did any better myself. thanks for your thoughts!

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Aaron February 7, 2014 at 6:49 am

It’s so rare today to read someone with your attitude Travis. Many look for the easy way out – and have no integrity or even self-responsibility to admit the fact they (like you say) “spent the money – so I need to pay it back”. God bless.

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Travis Pizel February 7, 2014 at 9:37 am

I took a minute after I wrote this to think of some things I remember charging on a credit card. Like our airline tickets to Hawaii, supplies, for countless dinner parties, and Christmas presents. All of those things sat as a balance on one credit card or another for years and years. Now at least I can look at the things around me, and think of the experiences I had and know that I finally have them paid for. :) thanks for your comment!

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Chris February 7, 2014 at 9:24 am

Congratulations! I’ve worked for a debt management agency for 13 years. I enjoyed reading about your experience and appreciate your sharing your perspective.

I’ve told clients who called me in tears, struggling to meet even the most basic of expenses due to severely reduced income or no income at all, that bankruptcy is a legal right, and there are times it should be considered, along with the advice of a legal professional in their state.

But I absolutely appreciate that you recoginzed you were able to pay your debt back and you found the best way to pay it back, for your situation.

Anyone facing debt repayment issues ususally has more than one option for debt solution – what’s important is weighing the issues and finding the best solution for their situation.

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Travis Pizel February 7, 2014 at 9:39 am

I agree with you 100%, Chris – Debt Management was the right choice for me, but it’s not a one size fits all. As you said, people struggling with debt need to research and educate themselves on ALL their options – then make the right decision that matches there situation. Great to get a comment from someone that’s worked for a debt relief company!

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David Barbour February 7, 2014 at 10:49 am

When it comes to debts, they are not always fair,when you have some one to go to, makes life a little easyer.

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Travis Pizel February 7, 2014 at 4:56 pm

There are many options available to help people get out of debt, David, and not everyone knows what they are. I know that when we started our journey, we had no idea what a debt management program was, or that it even existed. We took a crash course and ended up enrolling. I’m hoping to help educate people on what their options are! Thanks for dropping by!

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Paula / Afford Anything February 7, 2014 at 1:52 pm

wow, this is the best and most comprehensive blog post I’d ever read about the differences between declare bankruptcy or paying off debt. I think you made an awesome choice and your story is a huge inspiration. (sorry about the typos, I’m writing this on my phone, and for some reason the back space button isn’t working.)

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Travis Pizel February 7, 2014 at 4:52 pm

Thanks for the complement, Paula! Quite honestly, we should have done this research BEFORE we enrolled. We didn’t do all the right research before we dove into our DMP, but this post program analysis shows that we got lucky and actually went down the right path. The primary point, as stated in the comments above, is to urge people struggling with debt to educate themselves fully before making a decision. Thanks for reading, my friend!

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Melissa February 7, 2014 at 3:36 pm

This is such a great, inspirational post. The best news for me is that you were able to come out of your repayment with good credit scores! My husband and I have been stuck in some debt due to medical expenses, and I’ve wanted to do a debt management plan, but I don’t know which company to go with. Any suggestions on a good place to start the process of paying off our debt?

Melissa H.

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Travis Pizel February 7, 2014 at 5:12 pm

I was actually surprised at how good they are Melissa….I’m not a huge fan of the credit score. I was happy they were good for the refinancing of our home, but I’m hoping to not to have to use them again anytime in the near future. No more credit! :) As far as a good company to work with, I’m sure there are others that are reputable and will do a fantastic job – but the one I worked with was CareOne Debt Relief Services and they were absolutely wonderful. I will warn, you, however that medical debt may not be able to be put into a debt management plan. You’ll have to discuss with a rep about what your choices are. Thanks for commenting, and good luck – I’d love for you to come back and share what path you ultimately ended up taking!

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Vernon February 7, 2014 at 5:42 pm

I totally agree with the choice you made Travis…and I would like to share my own anecdotal evidence why that is. I’ll try and keep this short and to the point. My wife took care of the finances for the majority of our marriage which is over 20 years now. In May, 2012, she had a melt down from the financial pressures coming from all directions. I took over driving the financial bus for a while (we work together on it now) and took inventory…all things considered (mortgages, medical, credit cards, loans, IRS debt, etc.) we were $453,505.98 in debt. Not something that we are proud of, but there it was. I realized that we were on the verge of financial ruin and had to do something. So, as many do, we started to look at the various ways that we could start addressing this monster living amongst us that had only one goal…robbing us of our future. As you did, we also looked at bankruptcy as an option, but realized that we essentially would end up with a payment plan. So, we also looked at Debt Management programs and again came to the conclusion that we would end up paying for the privilege of having someone develop a payment plan for us. So, in both case I pretty much said, “I can do that”.
The first thing I did was to go through every single red cent sucking extrication entity (bills) and ensured we were current. We then pinky swore off of the credit cards and we haven’t looked back. We can honestly say that we have not used a credit card since May, 2012. We obtained a debit card and have only been using cash that we physically have in the bank. I started a budget in Excel and I don’t think I will ever be able to do without it again. It’s essentially a daily ritual now to review/update as needed and it only takes a minute to make sure we are on track. We gave ourselves $100 “pocket money” for each of us to spend as we want (we didn’t like the word allowance) and we are still continuing with that today. We then began the “debt snowball”. We originally had 22 bloodsuckers…uhhhhh…creditors that we were paying when we started…we are now down to eight. The amount we pay towards debt varies from month to month for various reasons, but we average about $3K/mth. There are several other things that we did to avert money from leaving our grasps, which really just meant going through the budget and understanding where every penny is going and more importantly, why. Once you know that, it easy to start figuring out what can change.
Part of the debt that we had was a house that we were renting out because we got stuck with it in 2008 when we were not able to sell it and the market crashed. It got to the point that we were never going to be able to break even on it, so after five years we decided it was time to do something about it and we successfully did a short sale. We aren’t proud that we didn’t pay what we owed, but there wasn’t much more we could do. We were just about to walk away from it at one point and then the bank would have been really happy with us. So, that wiped out $264K of the debt. Not including the house, we have also paid ~$81K towards debt since May 2012. I just wish that was all to the principle. We have done away with all the high interest credit cards now, so much more will be going to the principle of what we owe.
We originally figured it was going to take five years to dig out of this mess. We still have about ~$118K let to pay off, but we have come a long way in a short time. I now think we are going to be done between four and four and a half years. Can’t wait to be debt free but the house.
To circle back around…paying what you owe is always best in my opinion…after all, at the time, we all freely “signed up” for what we got into. My revelation was that I could do for myself what the DMP or the courts would do for me for a price that isn’t always measured in dollars. Anyone out there tackling debt…I wish you all the success in your endeavors to become debt free…I know our day is coming and there will be a party!

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Travis @debtchronicles February 9, 2014 at 6:46 am

Congrats to do it all on your own, Vernon, it’s a great testament to what a person can do when they really put their mind to it. For us, we had to take some sort of other action, however. One of our creditors, with which we had 5 accounts, was raising their minimum payment policy. When that kicked in, our monthly payments would skyrocket, and we would no longer be able to meet all our monthly financial obligations. Due to the lowered interest rate and payment negotiated by our debt relief company, we were able to stay current with all our payments and start down the road of making headway on our balances as well. Thanks for sharing your very inspiring story!

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property marbella February 8, 2014 at 3:07 am

Good job! You did the right thing and have shown that it is possible to lsa problems for both you and your wife. Big congratulations!

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Travis @debtchronicles February 9, 2014 at 6:49 am

Thanks for the support, Property marbella…we’re very excited to be done with our program, and moving on to building wealth now instead of atoning for our spending indiscretions of the past!

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Sher@fatguyskinnywallet February 9, 2014 at 11:50 pm

Once again, congrats bro! Great post. I think you made the right decision, especially from an integrity stand point. As you said, you borrowed every penny and I am glad you wanted to honor the agreements you made. Also, I am not sure if you would have learned some of the same valuable lessons along the way had you chosen the other way.

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Travis @debtchronicles February 11, 2014 at 12:55 pm

That’s a good point…I’m not sure we would have learned all the same lessons. That’s a bit of a gray area though since we chose a different path. I did learn through my research that you’re required to take a credit counseling class as part of going through bankruptcy – which I was pleasantly surprised to learn. The root reason for why the debt was incurred in the first place MUST be addressed…or the cycle may repeat itself.

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Shari February 12, 2014 at 8:06 pm

After consulting with a debt consolidation specialist and then a lawyer, we ultimately decided to claim bankruptcy. It took two years to see our credit improve but now we are back on track. We were unable to pay our outstanding debts because of health issues. If you were able to pay off that debt, I think you made a good choice for your situation. Bankruptcy was the right decision for us.

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Travis @debtchronicles February 12, 2014 at 8:26 pm

Thank you so much for sharing your story, Shari! There ARE corrected uses of bankruptcy, and your story sounds like one of them. If you were truly unable to pay your debts, then bankruptcy protection is one way you can get your lives back on track and start fresh. I’m glad that you found the right solution for you!

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Alex @ Credit Card XPO February 15, 2014 at 7:33 am

What you guys accomplished is amazing. I would have chosen the same route to eliminate debt and avoid declaring bankruptcy. Congrats!!!

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Travis @debtchronicles February 17, 2014 at 4:54 pm

Thanks Alex, appreciate you reading, and for the support!

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Julie March 10, 2014 at 8:28 pm

No- we don’t all “freely” choose to get ourselves into debt. Some of us have spouses who run up a quarter million in debt with out telling us. Then the spouse refuses bankruptcy and uses every penny he earns to pay down bad debts- leaving me, the responsible one, stuck with paying all the current bills- like utilities, insurance etc. and with no money left to save for retirement.
Four years later and we are only about half done. Guilty spouse is about to hit 65 and thinks he will retire on SS. What a joke. He has items he won’t sell that could go to pay off debt but refuses. I don’t know whether to laugh or cry.

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Travis @debtchronicles March 12, 2014 at 4:51 am

To be honest with you, Julie, I think I’d cry – although maybe laughing would be a better perspective that would help you keep on keepin’ on. If he thinks he’s going to retire on SS, and won’t sell items to help pay down the debt, it seems to me he hasn’t come to terms with what he did was wrong, and doesn’t feel any responsibility for the position he’s put both of you in. On the positive side, you said you’ve paid off half of it in 5 years…that’s quite an accomplishment! I wish you all the best in getting things back on the path to success.

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Caleb March 17, 2014 at 10:59 am

Debt is not fun at all and there can be many unavoidable causes for someone to enter major debt. Bankruptcy can be an option but not in every case. Consulting with a professional is important for any situation to get a professionals opinion on what the best option may be.

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Travis @debtchronicles March 18, 2014 at 3:18 am

It’s always a good idea to investigate ALL your options for getting out of debt before selecting a path. Checking with a bankruptcy attorney is definitely one of those options to investigate – thanks for your thoughts, Caleb!

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