By David Pilley on September 2, 2011
.jpg.aspx?width=75&height=75) Choosing between debt settlement and bankruptcy may be a difficult decision. One (bankruptcy) seems like the easy road, while the other (debt settlement) seems like the tougher journey. However, they both have their advantages and disadvantages, so it’s important to assess your individual financial situation before choosing.
If you are going to choose bankruptcy, you need to be desperate. You need to be insolvent, meaning that your total debt is more than your income. You also need to be aware of the two types. Chapter 7 bankruptcy is liquidation, meaning you are absolved of the majority of your debts, but you must also give up much of your property to suffice. (Debts like student loans and alimony/child support are not exempt.) Meanwhile, Chapter 13 is reorganization, similar to a debt consolidation. The debtor draws up a plan to repay creditors over the course of up to five years. Under Chapter 13, you may keep your home, but there are limits as to how much debt is eligible for this bankruptcy. (Any unsecured amount under $360,475 and any secured debt less than $1,081,400 is eligible for Chapter 13.) With both types of bankruptcy, you may receive an automatic stay. This is a court order prohibiting collection attempts from your creditors while you are bankrupt. This may be a benefit to you, as you should not be receiving any more harassing phone calls about why you haven’t paid your bills. If creditors break this rule during an automatic stay, you may be able to press charges.
Debt settlement, on the other hand, deals with a lesser amount of debt. Settlement companies will usually require an amount over $7,500 in order to negotiate for a lower amount. If your debt does not exceed your income, settlement is the obvious choice over bankruptcy. If you wish to get help from a debt settlement company, make sure it is a non-profit organization. There is some regulation in the market, including the fact that debt settlement companies can no longer charge upfront fees and they can’t receive any payment from you until the final payment plan has been drawn up and signed by the debtor. However, some companies may charge excessive monthly fees during the process, so make sure you look for a company that is part of a trade association, such as the Association of Settlement Companies (TASC).
Whichever you choose, money out of your pocket will be involved. Bankruptcy proceedings will involve court costs of up to $300. A debt settlement may involve a one-time lump-sum payment, and it is absolutely crucial that you be able to pay the amount on time. In my opinion, debt settlement hurts less than bankruptcy, especially on your credit report. Future lenders will be less likely to give you a low interest rate on their loans if they see you have had a recent bankruptcy. Bankruptcy will appear on your credit report up to ten years, so having a debt settlement can be less damaging, especially if it appears as “paid in full.” Therefore, even though bankruptcy seems easier, I would rather look at debt settlement. Keep bankruptcy in the back of your mind, but always consider a settlement before a complete overhaul of your financial situation.
|