Can a Person File for Bankruptcy If He Has Done a Debt Settlement?
You can file for bankruptcy if you have engaged in debt settlement. Debt settlement allows you to resolve delinquent debts by paying less than the full amount owed. Once the debt is paid in full, it becomes a non-issue as you consider bankruptcy. Debt settlement, which can be self-directed, is considered an alternative to bankruptcy. However, the process takes time and some people feel forced to switch to bankruptcy if their creditors become impatient and begin filing lawsuits to collect on debts.
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Debt Settlement Basics
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Debt settlement is available only on unsecured accounts, such as credit cards. The unsecured nature of the account means there is no collateral other than your signature and promise to pay. That makes unsecured accounts different from secured credit accounts, such as car loans. The automobile itself serves as collateral on an auto loan, and if you stop making payments, the lender can repossess the car. Such an option isn't available on unsecured debts, which is why creditors often are willing to settle on accounts that are unsecured.
Debt Settlement Benefits
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Debt settlement offers benefits for both you and your creditor. Debt settlement is less damaging to your credit than bankruptcy, and the creditor may receive more money from you through debt settlement than through bankruptcy. For example, Chapter 7 bankruptcy, the simplest form of personal bankruptcy, allows unsecured debt to be eliminated in just a few months, with unsecured creditors sometimes receiving nothing. In debt settlement, creditors generally try to collect 20 to 75 percent of the balance, according to the SmartMoney website.
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Listing Your Debts
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You are required to list all your debts when you apply for bankruptcy. Accounts that have been resolved and paid off through debt settlement won't be included. However, if you are still in a debt settlement plan, any remaining debt being negotiated must be included in the bankruptcy.
The Automatic Stay
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When you file for bankruptcy, a legal motion called an "automatic stay" will be signed by a judge. The automatic stay is a legal injunction that forces all debt collection activity against you to stop immediately. This includes creditors who were collecting from you through debt settlement agreements.
Free Consultations
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You should consider speaking to a bankruptcy attorney if you currently are involved in debt settlement and are thinking of filing for bankruptcy. Initial conversations with a bankruptcy attorney usually are free, allowing you the opportunity to question the attorney about the process. You should not ask a for-profit debt settlement consultant about the pros and cons of filing for bankruptcy and the effect your debt settlement might have on the process. Debt settlement agencies are in competition with bankruptcy attorneys and may not offer unbiased advice. For a complete overview of debt management strategies, schedule a meeting with a nonprofit credit counselor approved by the U.S. Trustee Program of the U.S. Department of Justice.
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