Bankruptcy Or Debt Settlement? Popular Debt Help Options
Debt settlement versus bankruptcy? Plenty of people will have to select several forms of debt relief to think over. If this applies to you, keep in mind that debt settlement and bankruptcy have both pros and cons. Optimally, you will talk with an expert debt attorney prior to deciding; the following is a practical points for getting ready for either.
Independent of the way you decide on, there are a few steps that are central to either bankruptcy or debt settlement. At first, ask for a copy of your credit report from a reporting agency. For example, one of these groups is Equifax Credit.
Review your credit report and hunt for errors, such as inaccurate private info, bills that don't belong to you and possibly accounts shown with totally that are actually paid already. It's very important to understand your precise number. The median score is likely in the higher 500s.
Finally, determine how much you owe to pay back by totalling the totals of each of your debt accounts, secured and any others. Employ this data when finalizing your decisions regarding bankruptcy law firms or debt settlement assistance to help reconcile your debt issues.
Examine the benefits and cons of deciding on a debt settlement arrangement. Ask a particular debt settlement group how your life could be affected. Will those offensive creditor calls end? And, look into how a debt settlement program will impact your score in the future.
And, be sure you're ready for the problems of a debt settlement programs, such as the potential for increased creditor calls, potential collections suits lead by creditors, lowered credit and tax issues. If you don't foresee that you can take the problems, then you can probably seek out some other debt solution.
Bankruptcy potentially is a final choice for debt problems. Therefore, think if you have any other options for solving your financial problem short of deciding on bankruptcy. Look around for other solutions to your debt problems such as debt settlement. In addition, attorneys who practice bankruptcy law have begun to offer debt settlement services to individuals.
Determine if you can file for bankruptcy by scanning the new issues of the federal bankruptcy regulations. However, the revamped bankruptcy code is really complicated to comprehend. It might be better to meet with a great bankruptcy attorney. The revised bankruptcy regulations may be located on the net. Plenty of books trying to offer the regulations in plain English are being written, so check out your area library for a few helpful titles. Even if you talk over your debt concerns with a lawyer who works in bankruptcies, you may still want to understand bankruptcy on your own.
Finally, another important consideration is figuring if filing for bankruptcy will resolve your credit issues. Depending on the varieties and totals of your debts, a bankruptcy filing will not necessarily rid you of the duty to pay a few of your bills. Keep in mind that a bankruptcy filing remains on your report for ten years, while a bad debt is recorded for seven.
To ultimately understand what the ideal option may be, most may want to consult with a bankruptcy attorney who works in debt settlement. The ideal option for one client can be quite dissimilar for another.
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Debt settlement or bankruptcy: Which option is better for consumers?
The credit card debt problem is still considered as a big problem in the country. Debtors are running to different debt relief agencies to overcome this problem. There are many types of debt relief options such as self-repayment option, debt management, debt settlement, debt consolidation, and bankruptcy. But you should opt for the best option to get out of debt. Today I’m going to discuss whether debt settlement is a better option or bankruptcy.
Debt settlement: How does it work?
You can settle your debts yourself. However, in case of huge debts, you should take the help of a debt settlement company. The company will negotiate with the creditors on your behalf. In the negotiation process, if the creditors agree to settle your debt, then they’ll reduce the outstanding debts.
If you want to settle your debts yourself, then you need to negotiate with the creditors. You should discuss your financial hardships with the creditors. You’ll have to show the detail record of your income and expenditures to them. Remember, the creditors may not agree to settle your debts. To convince your creditor for the agreement, you'll have to prove your efficiency towards your personal finance. You shouldn't miss any payment just before settling your debts.
If you get help from a settlement company, it will arrange a counseling session for you on debt and money management. The company will ask you to save money in a Trust account . Gradually, they’ll start the negotiation process with the creditors.
According to the financial experts, a debtor’s last option will be bankruptcy. Remember, filing bankruptcy helps you to get a discharge from all or some of your debts, but it hurts your credit score. Once you file bankruptcy , it puts a stay order on all of your debts . Thus, you’ll not get collection calls, no creditor can sue you, no lender can foreclose your house.
There are various chapters of bankruptcy, but your situation will depend on which you may be able to file.
If you file chapter 7 bankruptcy, then the bankruptcy trustee will sell off your assets to pay your creditors.
If you file chapter 13 bankruptcy, then the bankruptcy court will set up a repayment plan for you to pay your creditors according to the repayment plan.
Bankruptcy hits your credit score by many points. So, people believe that debt settlement is a much better option than bankruptcy. Yet both options have several advantages and disadvantages . Such as:
- Both bankruptcy and debt settlement lower a debtor’s debt level, but both hurt the credit as well.
- Bankruptcy hurts your credit badly. Yet it has some advantages such as it puts a stay order and discharges most of your debts.
- Once you file chapter 13 bankruptcy, you're not even required to sell off your assets to pay your creditors. It puts a stay order that debt settlement can’t provide.
- In the process of debt settlement, you’ve to depend on a debt settlement company if you cannot negotiate on your own with your creditors.
- Bankruptcy is a legal process monitored by the court and the judge.
- You can only settle your unsecured debts through a debt settlement process. However, in bankruptcy you can include all of your debts.
Remember, each case will be different from each other. So, you should have a talk with a financial expert before making a plan. Above all, both the cases will depend on various factors such as the person’s income, the debt situation, and the credit rating. You need to seek an expert’s opinion to minimize the risk factor .
Alternatives to Bankruptcy: Debt Settlement-Is It Feasible?
As I stated in my prior post, another way that you can deal with your debts is to attempt to settle your debts with your creditors. You can do this yourself or through any of numerous â€œdebt settlementâ€ agencies that typically populate television and the internet. Is a â€œdebt settlementâ€ a feasible alternative to bankruptcy?
We have written about debt settlement agencies quite a bit on this blog. Generally, we are not in favor of debt settlement agencies or debt settlement as a realistic means of dealing with your debts like Douglas Jacobs and Adrian Lapas stated. To more fully assess our opposition to debt settlement agencies; it is first appropriate to discuss what exactly is â€œdebt settlementâ€ and some of the problems facing the industry.
Typically, a â€œdebt settlementâ€ agency will promise to settle your debts for much less than what you owe. So, how do they do this? Generally, the debt settlement agency will total all of your unsecured debts like credit cards. They will then require that you pay money into their office every month and hold that money until enough is paid in so that the agency can start negotiating with creditors. In the meantime, the debt settlement agency will deduct their fees each month out of your monthly payments. Typically, the fee charged is 15% of the outstanding debt. Often, the debt settlement agency will withhold their fees before engaging any negotiations with any creditors.
Assuming that you have paid into the debt settlement agency enough money, the debt settlement agency will then attempt to negotiate with your creditors to settle the debt for less than what is owed in one lump sum. A typical settlement with any one creditor is to pay approximately 50-60% of the debt outstanding. So, if on one credit card you owed $10,000.00, the debt settlement agency would negotiate paying $5,500.00 and the debt will be satisfied. Of course, you will have also paid the debt settlement agency 15% of the outstanding debt which is $1,500.00. Total payment on this one debt is $7,000.00.
If that were you only debt, then perhaps debt settlement is a feasible option. After all, you are getting a discount (not much of one). However, most debtors are in a significant amount of debtâ€”anywhere from $30,000 up to $75,000 (or more!). If your debt settlement agency were to settle all of your debts of $50,000.00 at 50%, you would pay $25,000.00 on the debts plus you would pay $7,500.00 in fees for a total of $32,500.00.
Additionally, while you are paying enough money into the debt settlement agency to be able to settle with your creditors, your creditors are not getting paid. When they are not getting paid, they start reporting to the credit bureaus that you are behind on your payments. Once you are late on your payments, your credit score starts to tank. So, one of the reasons for contemplating a debt settlement agency (at least Iâ€™m paying the creditors somethingâ€”that should help my credit score, right?) turns out not to be so great.
There is another nasty, potential surprise, as well. If you settle a debt for less than what is owed, the creditor will most likely submit a Form 1099-C to the IRS on the amount of debt that was canceled or forgiven. Based on this 1099, the IRS may wish to treat the amount of debt cancelled as â€œincome to youâ€ for tax purposes! So, if you have a $10,000.00 debt and pay $5,000.00 and $5,000.00 has been canceled, the IRS may treat that $5,000.00 canceled debt as â€income to youâ€! This could mean that you are taxed on $5,000.00 more income than you received! Granted, if you file a Form 982 and can demonstrate that you were insolvent at the time the debt was forgiven or canceled, then the debt may not count as income but it is your responsibility to file the form as Kent Anderson stated on this site. This can be a hassleâ€”particularly if you are unaware of this requirement.
And, it should be remembered, that a debt settlement agency is trying to settle with all of your creditors. If one creditor chooses not to â€œplay ballâ€ and settle, then you are still stuck with paying the debt in full or take the consequences of not paying such as a lawsuit by that creditor. If a lawsuit is initiated and judgment obtained, then you may still be subject to all after-judgment procedures such as wage garnishment (if applicable) that a creditor can exert. So, you have just settled with most of your creditors and one is now throwing a monkey wrench into your plans.
So, there is no guarantee that a debt settlement agency will achieve your goals of getting rid of your debt. But, even if the debt settlement agency is able to settle your debts, your credit score will still be in the tank and you are likely to pay a lot of money towards this debt.
In comparison, a bankruptcy lawyer can get your debts discharged (assuming you pass the means test and other issues). Creditors do not get a vote. If you are eligible for a chapter 7 case and, in consultation with a qualified bankruptcy lawyer, you will come out of bankruptcy debt free! With regards to the tax consequences as mentioned above and as Dan Press stated, debts discharged in bankruptcy are not counted as income. While it is true that your credit will take a hitâ€”it is bankruptcy after all, once your bankruptcy case is over, you can work toward building back your credit.
Here is the kicker in the comparison between debt settlement agencies and bankruptcy lawyers, bankruptcy lawyers charge considerably less. For many routine chapter 7 cases, while fees will vary across the country, fees for lawyers generally are no more than $2,500.000 excluding filing fees and credit counseling fees. Compare that to the $7,500.00 that a debt settlement agency may charge on a $50,000.00 debt settlement plan. And, the bankruptcy lawyer can generally tell you with a reasonable degree of certainty that your debts will be discharged.
If you are facing overwhelming debt, consult with a qualified, experience bankruptcy lawyer such as those on this website. We will tell you candidly what your options may be. It doesn’t hurt to find out from a qualified professional about your options.
bankruptcy or debt settlement
Depending upon your financial situation debt settlement may or may not be the best solution to your financial troubles. Below is a basic comparison of debt settlement to Chapter 7 and Chapter 13 bankruptcy. Each situation is different so it’s recommended you consult an experienced debt settlement attorney in Phoenix.
Most people that file Chapter 7 bankruptcy have a low income and few assets. Chapter 7 bankruptcy allows you to discharge or eliminate most types of unsecured debt including credit cards, medical bills, personal loans, deficiency balances from a foreclosure or repossession, some tax debt and more. In order to qualify for Chapter 7 bankruptcy you have to meet certain income requirements and pass what is called the “Means Test.” If you receive a discharge in a Chapter 7 bankruptcy case most or all of your unsecured debt is eliminated.
Although Chapter 7 allows you to wipe most or all of your dischargeable debt, there are potential issues with filing Chapter 7 bankruptcy. First, if you have property that is not protected under the bankruptcy code, the trustee may sell your non-exempt assets for the benefit of your creditors. Second, a bankruptcy filing may significantly damage your credit and will show up on your credit report for up to 10 years. Another common issue with Chapter 7 bankruptcy is that your income is too high to qualify.
Most people that file for Chapter 13 bankruptcy either have too high an income to qualify for Chapter 7 bankruptcy or have nonexempt assets they want to protect. Chapter 13 bankruptcy is the reorganization chapter of bankruptcy where you repay some or all of your unsecured debt through a 3 -5 year repayment plan. Some people who file Chapter 13 bankruptcy pay only a small fraction of their debt while others pay 100% of their unsecured debt. Chapter 13 bankruptcy allows you to discharge or eliminate most types of unsecured debt including credit cards, medical bills, personal loans, deficiency balances from a foreclosure or repossession, some tax debt and more. The amount of debt you repay through a Chapter 13 bankruptcy depends upon your income and property. Chapter 13 is often used to catch up on secured debt payments such as a mortgage or car loan, and may allow you to remove a second lien on a property (lien stripping) or reduce the amount owed on a secured loan. (cram down).
There are many drawbacks to filing Chapter 13 bankruptcy. First, a Chapter 13 repayment plan requires you to turn over most if not all of your disposable (leftover) income for a period of 3 – 5 years. Although some debtors filing Chapter 13 bankruptcy may pay less than 10% of their unsecured, others pay 75% or more due to their income or assets. Another issue with Chapter 13 bankruptcy is that you are under the court’s control for length of the plan. Consequently, you cannot buy or sell assets or do much of anything without asking the court’s permission. Finally, a Chapter 13 bankruptcy will negatively affect your credit score and will show up on your credit report for up to 7 years.
Most people that participate in debt settlement do not qualify for Chapter 7 bankruptcy and would be required to pay more of their debt in a Chapter 13 bankruptcy. Unlike Chapter 13 bankruptcy where the amount you pay of your unsecured debt is based upon your income and assets, debt settlement involves negotiating with each creditor to settle your debt for less than what is owed. The settlement amount varies depending upon the type of debt, the amount of the debt and the individual creditor. Although debt settlement will negatively affect your credit, the damage to your credit is generally less than if you were to file Chapter 7 or Chapter 13 bankruptcy.
As with Chapter 7 and Chapter 13 bankruptcy there are drawbacks to debt settlement. In addition to having to pay a substantial amount of debt, the amount that is forgiven by your creditors can be treated as taxable income. Another issue with debt settlement is that unlike bankruptcy your creditors are not required to settle and occasionally refuse to do so.
Deciding to file Chapter 7 bankruptcy, Chapter 13 bankruptcy or debt settlement may be one of the most important decisions you make in your life. It’s important to consult an experienced debt settlement lawyer and bankruptcy attorney to make an informed decision as to your best course of action. At Instant Settle Consultants we handle both debt settlement and bankruptcy so our attorneys can offer an unbiased opinion as to whether Chapter 7, Chapter 13 or debt settlement is your best option.