How to Compare Debt Settlement vs. Bankruptcy

Debt is a part of life, but too much debt can make life difficult to enjoy. Two potential solutions to resolving this problem and starting your financial life anew include filing for bankruptcy or using a debt settlement company. Before you commit to either option, it's important to know the pros and cons of using a debt settlement company versus filing for bankruptcy to help alleviate your financial woes.

Difficulty: Moderate

Instructions

Determine the Extent of Your Debt Problem

1. Request a copy of your credit report from one or all three major credit reporting agencies in the U.S. The companies are TransUnion LLC, Equifax Credit Information Services, Inc., and Experian.

2. Review your credit report and check for inaccuracies, such as incorrect personal information, accounts that do not belong to you and even accounts listed with balances that are actually paid in full. It's also important to know your FICO score, which is a credit score system. The acronym 'FICO' is derived from the name of the software used to calculate the score. While FICO scores range from 300-850, the average score is somewhere in the high 500s.

3. Determine how much debt you have by adding up the balances of all of your credit accounts, loans, both secured and unsecured, and even collection accounts.

4. Use this information when making your decisions about filing for bankruptcy or employing a debt settlement agency to help alleviate your financial problems.

Examine Your Monthly Finances

5. On a sheet of paper, list all of your monthly income including paychecks, alimony/spousal support, child support, bank, investment and rental interests or income. If you work overtime or receive bonuses, include that information, too. If you opt for filing bankruptcy, you will need to include your average monthly income from the six months prior to filing in your bankruptcy petition, so it's important to get these numbers no matter which solution you opt for, bankruptcy or credit counseling.

6. On another sheet of paper, list all of your mandatory monthly living expenses, such as for housing, transportation, insurance, prescriptions and doctor visits, utilities, groceries and education-related costs. Don't include payments for credit card debts, entertainment, or other items that are not necessary for your day-to-day survival. Definitely do not list an expense twice. That means if you used your credit cards to buy prescriptions, include that cost in your mandatory expenses list. However, if you used your credit card to buy a shirt, do not list the purchase on your mandatory expenses list at all, unless it was necessary for say, work.

7. Subtract the total of your monthly living expenses from your total monthly income. A balance indicates you have expendable income you could potentially use to pay down your debts. A zero or negative balance indicates you do not have expendable income that could be used to pay down your debt.

8. These calcuations are important for helping you formulate your decisions about filing for bankruptcy or seeking the aid of a debt settlement agency.

Determining if Debt Settlement is Right For You

9. Determine if you could pay down your debts with your current income. If your income does not exceed your housing expenses, utilities, gas, groceries, and basic financial needs for the month, debt settlement is not a viable solution for you. However, if your monthly income exceeds your basic living expenses, debt settlement may help you resolve your financial crisis.

10. Determine if your debt situation qualifies for debt settlement services by examining the total amount of unsecured debt you owe. To qualify, you will usually need to owe at least $7,500 in unsecured debt. However, the qualifying balance will vary by debt settlement company. Make sure you ask each debt settlement company about their unsecured debt balance requirements to determine which debt settlement company is right for your situation.

11. Look for reputable debt settlement companies. Companies that charge huge fees up-front are companies to be avoided. Opt for debt settlement companies endorsed by the Better Business Bureau, or some other reputable pro-consumer group. Make sure to check that their fees are reasonable for the services rendered.

12. Compare the services each company offers. Look for companies with a sound history of effectively negotiating with creditors. Ask for references or case studies you can examine that prove the company's track record. If company representatives are hesitant to provide you with that information, walk, don't run, out their door.

13. Examine the pros and cons of committing to a debt settlement program. Ask the debt settlement company if by hiring them to represent you to negotiate your debts will your various creditors how your life might be impacted. Will those harrassing creditor calls stop? (possible, but no guarantees. Creditors can still contact you for the collection of debts they are owed unless or until you file bankruptcy). Also, inquire how a debt settlement program will impact your credit in the future and what the long-term side effects to your credit might be.

14. Make sure you are prepared for the drawbacks of debt settlement programs such as the potential for increased creditor calls, possible collection lawsuits initiated by creditors, damaged credit and tax problems. If you don't think you can handle these possibilities, then you should probably look for another debt solution.

Determining if Bankruptcy is Right For You

15. Determine if you have any other options for resolving your financial crisis short of filing bankruptcy. Look online for other solutions to your debt problems such as debt settlement, debt management and nonprofit assistance. In addition, attorneys who practice bankruptcy law have begun to offer debt settlement services to clients who might have filed a bankruptcy before the Bankruptcy Code was overhauled in October, 2005, and find the new laws too onerous.

16. Determine if you qualify for bankruptcy by reading the most current version of the U.S. Bankruptcy Code, found in Title 11 of the U.S. Code. However, the revamped Bankruptcy Code is extremely complex to understand, so don't be surprised if you aren't able to comprehend much of what you are reading. The Bankruptcy Code can be found online. Many books attempting to explain the Code in plain English have been written, so check out your local library or bookstore for some helpful titles. Even if you discuss your financial problems with an attorney who specializes in bankruptcies, you might still want to read up on the law for yourself.

17. Determine which bankruptcy chapter you qualify for by reading the descriptions of each type of bankruptcy, as well as by reading the rules and regulations associated with each. This information can be found at your local library, bookstore, online, or by talking with an attorney who handles bankruptcies in their everyday practice.

18. Court costs for filing bankruptcy are different depending on which chapter you file. Currently, a Chapter 7 bankruptcy costs $299 in filing fees while a Chapter 13 costs $274, although Congress can change those fees at any time. It will also be important to learn how much an attorney will charge you to represent you in your bankruptcy. If you meet with a bankruptcy attorney, they will likely give you a written fee quote for their services either at your first meeting or perhaps in the mail. Do not expect to be able to email a bankruptcy attorney for a price quote on what they would charge for their services. Bankruptcy is an extremely complex area of law and an attorney well familiar with the law's complexity wouldn't likely give you a fee quote over the phone or in an email without knowing your entire financial picture. Would you call a doctor to ask how much it would cost to set your broken arm? Do you think the doctor would even come to the phone, and secondly, do you think they should or would give you an answer? They don't know how broken your arm is by talking to you on the phone and a bankruptcy attorney doesn't know how bad your financial situation is until they meet with you to discuss it.

19. Another important consideration is deciding whether filing for bankruptcy will resolve your credit problems. Depending on the types and amounts of your debts, a bankruptcy filing won't necessarily rid you of your duty to pay some of your bills, even though you filed for bankruptcy. Keep in mind that a bankruptcy filing remains on your credit record for ten years but a bad debt is only supposed to stay on a credit report for seven.

Tips & Warnings

• You can get your credit reports and FICO scores online for free by signing up for a free trial of a credit monitoring company like MyFICO.com.
• Experian.com offers a free tool that lets you examine how changes in your credit balances can improve your credit score. This can be a valuable tool for determining your debt reduction options.
• Create a spreadsheet to help organize and compare all of your financial data. Microsoft Office has templates you can use to help you with this process.
• It is a good idea to keep your supporting financial information organized in a folder or binder, as you will need this information whether you file for bankruptcy or hire a debt settlement company.
• You can call your local Social Services office for referrals of reputable debt settlement companies, as well as for referrals to other debt solution programs.
• To help yourself understand what debt settlement is and is not, and what happens during the process, read various resources on the topic.
• You can find a great collection of rules and regulations that govern filing for bankruptcies on the Cornell Law School website.
• Bankruptcy laws changed in October 2005, so you will need to be sure your financial situation still qualifies for bankruptcy court protection, if you hope to file a case.
• Both bankruptcy and debt settlement can hurt your credit rating for many years, although engaging in one or the other is a positive sign to your creditors you are taking your debt problems seriously.
• If you wish to buy a house in the decade following filing for bankruptcy or using a debt settlement service , your ability to do so may be severely limited. On the other hand, once a bankruptcy has been discharged, meaning debts that could be erased from your credit report should be removed, creditors know you can't file again for many years. Because of this, many are willing to extend you credit, despite your bankruptcy filing. However, it will likely cost you more.
• In most cases, debt settlement will not stop harassing calls from creditors.
• Debt settlement will not help you reduce the amount you owe on your mortgage, car loan, or other secured debts. In these situations, lenders can repossess the collateral to collect on the debts they are owed.

[goombahrobby]

on 8/19/2009 you caa also check out www.sydfinancial.com they are an awesome company, real nice guys over there. If you're looking at debt settlement as an option i highly recommend them. also the back-end company they deal with is on top of the game. Love these guys *2 Thumbs Up*

[choicearizona]

on 1/9/2009 Thanks for the long and detailed explanation. I've found a site that is good (http://www.nationwidedr.com/) is someone does want to consider debt negotiation. It appears like they can cut your debt way down and monthly payments nearly in half. That's encouraging.

[debtcounselor]

on 11/26/2008 Debt settlement is a good option, but you can consider opting for a debt management plan from a certified credit counseling agency. http://www.endyourdebt.org/home.aspxis a good source for comprehensive information on debt management issues.

[mklawler]

on 5/26/2008 I also spoke with many others in the community at www.careonecredit.com and got a lot of good info and advice on all of these options as well. Good find.

[mklawler]

on 5/26/2008 I spoke with a lot of people in the community at www.careonecredit.com and got info on all of this as well.