June 20, 2019

Debt Settlement vs. Bankruptcy

The weight of insurmountable debt is enough to crush the life out of anyone. Even though you took on that debt with every intention of paying it off, circumstances can change. If you’re no longer able to honor those obligations, it’s only natural to look for a way to resolve them. Debt settlement and bankruptcy are options that are worth considering. How do they compare? Here are some basics that you should know.

Understanding How Debt Settlement Works

Also known as debt negotiation, debt settlement is all about coming to an agreeable solution with your creditors. It involves approaching each one and offering to pay a lesser amount in return for dismissing the obligation. This can be done by the debtor or it can be managed with the help of a debt settlement agency.

Assuming that the creditor is open to this solution, it’s possible to identify the amount that you must pay and the date that the payment must be received and posted. Once you remit the payment and it’s accepted, any remaining amount is written off and you no longer have an obligation to that creditor.

The Potential Drawbacks to Debt Settlement

While debt settlement sounds good, there are a few issues that may prevent this from being the best solution. First, no creditor is under any obligation to accept less than the total amount owed. Some will work with you simply to avoid the possibility of getting nothing if you file for bankruptcy. Others are not open to settlements under any circumstances.

Second, the settlement will likely end up on your credit report. Expect them to remain there for at least seven to ten years. In the meantime, they count as negative information that works against rebuilding your credit score.

Last, there are tax implications. Depending on the amount of debt that’s written off, you may have to account for it when you file your taxes. That can make preparing the returns a little more complex.

How Bankruptcy Works

Bankruptcy comes in two forms. With a Chapter 7, all of your qualified debt is discharged. You may or may not need to turn over assets to the trustee. The trustee oversees the sale of assets and distributes the funds to the creditors. Once that’s done, the remainder of your debt is discharged. The entire process usually takes somewhere between 60 and 90 days.

If you have debts that cannot be discharged in a Chapter 7, a Chapter 13 is a possibility. This essentially places you under the protection of the court for a period of three to five years. During that time, you make payments directly to the court. The trustee retains a small amount and the rest is distributed to your creditors. At the end of the prescribed period, any remaining debt is discharged.

Why Bankruptcy May Be Your Best Bet

One of the immediate benefits of either form of bankruptcy is that all collection efforts stop when you file your petition with the court. That means no more threatening letters, no collection calls at work, and no fears when your personal phone rings. If a creditor has any questions, they must be addressed to your attorney.

Should a creditor persist in attempting to collect a debt after being informed of the bankruptcy filing, pass that information to your attorney. Your attorney will make sure that those attempts will quickly come to an end.

In terms of your credit rating, bankruptcy helps undo the damage that was already done. Initially, expect your scores to decrease. That will change in the months ahead as your scores begin to improve. Even if you opt for a Chapter 13 that takes the full five years to complete, your score will be in much better shape by the time the court discharges your case.

Which solution is best? The only way to answer that is to look closely at your personal circumstances. Schedule a consultation with a bankruptcy attorney and find which Chapter suits your position best.