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Debt Settlement vs. Bankruptcy

Have you fallen so far behind on credit card payments or have you accrued too much debt for your income? Unfortunately, this is not an uncommon occurrence. Many individuals see the financial impact these issues have on their day to day lives. In this article, you will have information to help you decide whether a debt settlement or bankruptcy is the right option for you.

Below are just a few of the main points of both options, as well as information on knowing when you should settle or file.

Debt settlement vs. bankruptcy

With both debt settlement and chapter 13 bankruptcy, you will be required to repay a portion of your debts. However, with debt settlement, the repayment time will be shorter. Bankruptcy will stay on your credit report for up to 10 years after discharge. However, with debt settlement, your credit score will not be affected as punatively. Another important factor is that you can handle debt settlement on your own or with a consultant, but filing for bankruptcy involves legal proceedings. If you qualify for a Chapter 7 bankruptcy, then you will not have to repay the debts; however, you must pass the income “means” test to qualify and this will affect your credit score drastically.

Debt settlement should not be confused with credit counseling or a debt management program. These companies help individuals with creating a budget, advise them not to utilize unsecured credit cards as forms of payment to creditors, make regular deposits into an escrow or dedicated account and encourage them to make an offer to settle the debt with the accumulated money.

What is debt settlement?

Debt settlement is also known as debt negotiation or debt arbitration. It is a private transaction between you, a debt settlement company, and your creditors. The debt settlement company will negotiate with your creditors to reduce your overall debt by paying an agreed upon amount which will be less than what you owe. The debt settlement plan is usually 24 to 48 months to settle your debts.

A debt settlement consultant will attempt to settle debts either with a lump sum of a lesser price or reduced monthly payments with reduced interest rates and fees. Debt settlement companies charge a fee ranging from 15% to 25% of your total debt. You can negotiate terms yourself with the creditors. However, you may be required to have at least 40% to 70% of the total settlement amount agreed upfront.

Debt settlement is typically the fastest option for customers to reduce and pay off their debts. The average customer will save close to 50% of their total debt when they choose to use a consultant with a debt settlement company.

What is bankruptcy?

Bankruptcy impacts your credit score and credit report differently than when you choose to use a debt settlement company. There are two common types of bankruptcy, Chapter 7 – liquidation of assets, and Chapter 13 – reorganization. Chapter 13 bankruptcy creates a repayment plan which can span anywhere from three to five years. This process can cost upwards of $3,000 for attorney fees. This may not be the best option if you do not have the cash reserved.

Generally, student loans cannot be eliminated or even modified in bankruptcy, and only tax debts that are older than three years can be discharged. Tax debt requires that you prove you did not deliberately fail to pay taxes. You will need to gather your financial records, bank statements, loan documents, pay stubs, credit card statements, and complete a bankruptcy petition, statement of financial affairs, schedules, and other required documents to be filed with the court.

Chapter 7 bankruptcy is a quicker process, usually taking anywhere from three to six months to complete. Once the debts have been discharged, you can start to re-establish your credit by applying for a secured credit card or being added on as an authorized user to someone else’s account and sticking to a budget to establish credit. A judge ultimately decides if your bankruptcy will be granted. Also, the creditors must stop calling you to collect the money. Both bankruptcy options become part of your public record and will be reported to all three credit reporting agencies. Chapter 7 bankruptcy will remain on your credit report for ten years, while Chapter 13 bankruptcy remains for seven years. You are limited to filing for bankruptcy once every eight years.

Debt Settlement vs. Bankruptcy – When to settle or file

As you consider debt settlement or bankruptcy, it is crucial to take an honest look at the amount of your debt, your budget, and your available net income. Think of your short and long-term financial goals and how your credit score will impact these. Debt settlement may be a good debt relief option for people who do not want to file bankruptcy or do not qualify for it. Debt settlement is often quick and could be completed in a few years. This would take significantly less time than the payment schedules under a “reorganization” Chapter 13 bankruptcy. If you choose a debt settlement service that offers reasonable fees, this can be a cost-efficient solution and save you even more money in the long run.
Making a decision about your financial future can be tough. This article on debt settlement vs. bankruptcy is intended to provide you with the best information possible. An important decision with the least impact on your credit score and pocketbook is the difference between settling a debt or filing for bankruptcy. Speak with one of our consultants at Roundleaf Inc., for more information and help in making your decision.

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