Settlement Vs. Bankruptcy
Debt settlement and bankruptcy are two options to clear your debt and improve your financial situations. Although bankruptcy can remain on your credit report for seven to 10 years, debt settlement also has adverse implications to your credit. The pros and cons of each depend on your financial situation and goals.
Other People Are Reading
-
Types
-
Debt settlement can come in several different types:
Interest reduction: Negotiating with creditors can result in interest rate reductions, reducing your payments and the total debt over time. This can assist in paying debt without a huge drop in your credit rating.
Debt settlement: This is when you call or visit with creditors to reduce the overall total of the debt you owe. In most cases, this will require a cash payout or a structured payback plan.
Bankruptcy usually occurs in one of two options.
Chapter 7: A total liquidation of assets. The debtor sells and pays off as much of the debt as possible and writes off the rest. This is used most often for individuals rather than businesses.
Chapter 13: More like a repayment plan. The person who owes the money gets to keep his assets while a court-ordered repayment plan for all or part of the debt is set up.
Benefits
-
The benefits of debt settlement are:
• Although it damages credit, steps can be taken such as negotiating with the creditor to remove the debt or note it resolved on your credit report to lessen the damage of a default notice.
• It does not stay on your credit report as long as a bankruptcy.
• It shows future creditors you tried to meet your obligationsThe benefits of bankruptcy are:
• Total debt elimination can give you a new start.
• Government-structured payment can eliminate lawsuits from creditors.
• Stress relief. -
Warning
-
Debt settlement may not be the end of the road. Although creditors may agree to a settlement, you should get it in writing. They can come back and sue you or may not negotiate at all because they would rather sue you to get their money.
Also, debt negotiators are not lawyers, so be sure to get anything they have negotiated in writing too.
Bankruptcy will stay on your credit report for up to 10 years. This will make it difficult to obtain financing for larger purchases.
Considerations
-
Whether you chose debt settlement or bankruptcy, you should know that both will have negative effects on your credit and that neither should be chosen lightly.
In the case of debt settlement, some credit card companies actually require you to be in default before they will work with you.
Bankruptcy may not be an option for you if you do not met the means test, which was set up when bankruptcy laws were revised in 2005. The means test is a two-part test, but you only need to pass one part to qualify for a Chapter 7 filing.
One test is the median income test. It evaluates your average income over the last six months. If is below the your state's average, you qualify for Chapter 7. The other test is based on your income. It looks at the amount that you can pay over five years, and if you cannot pay at least 25 percent of what you owe, then you will qualify.
You can obtain forms 22a and 22c for the U.S. Department of Justice to take the test (see Resources).
Reminders
-
A common misconception about bankruptcy and debt settlement is that your credit will not be affected. Here are a few items that people sometimes forget.
1. Debt settlement will require you to stop charging on the credit cards you settle and may require a cash settlement.
2. Some forms of bankruptcy do NOT wipe out all your debt. You may not be eligible for Chapter 7, which does wipe out your debt.
3. Creditors don't have to agree to debt settlement, but do have to abide by a bankruptcy ruling.
4. Your credit will be affected by a debt settlement, but the degree will be determined by the agreement you reach with your creditor.
5. A lawyer of debt counselor can give you advice, but you should decide which option is best for you since they make money off your decision.
-
References
Resources
- Photo Credit Tracy O.
