Debt Settlement vs. Bankruptcy
By
A recessed economy and bursting of the real estate bubble have pushed borrowers to the point where they can no longer keep up with payments on their credit cards and consumer debt. For those searching for solutions, the decision often comes down to choosing between a variety of debt relief options. The options include debt counseling, debt consolidation, bankruptcy, and debt settlement. Of the four, debt settlement and filing bankruptcy have become the most popular of the solutions due to their advantages relating to decreasing current payments and the reductions in outstanding balances of debt.
For consumers, the two most common filings are chapters 7 and 13. Of the two, chapter 7 allows for much better outcomes for filers with steep reductions or outright dismissals of debt. Prior to the overhaul of the bankruptcy code in 2005 chapter 7’s were immensely popular for just that reason. Since the overhaul, the choice of which of the two chapters would be available to the consumer is decided by the court depending on the outcome of a means test which is the required first step in any bankruptcy filing. The means test is essentially an evaluation of the filer’s income and expenses which is then set against debt redemption standards as set by the IRS. Measured against the IRS standards, if the borrower falls short of income guidelines he can then file for bankruptcy under the auspices of chapter 7. The guidelines for qualifying for chapter 7, however, are stringent. If the means test reveals that a borrower can pay even one hundred dollars per month toward debt, the filing will automatically go toward a chapter 13 bankruptcy. In either situation, the borrowers are required to get credit counseling and budget analysis at their own expense.
Chapter 13, while providing some relief on current payments, is not nearly as consumer friendly as chapter 7 and carries disadvantages that convince many borrowers that the option is just not for them. The biggest disadvantage is that once the terms of the filing are set, a borrower’s finances can be overseen by a trustee of the court. The invasiveness of having an outsider involved in day to day or monthly budgeting becomes an immediate deal killer and typically turns the borrower toward debt settlement.
Debt settlement, also known as debt negotiation, is a relatively new and aggressive form of debt relief offering many advantages over counseling, consolidation, and bankruptcy. The first and most immediate advantage is an approximate reduction of 50% on payments related to each account rolled into the debt settlement. Accounts which can be rolled into the settlement include credit cards, department store debt, unpaid utilities, medical bills, and other unsecured debt. Other advantages include:
* Being proactive in pursuing a debt settlement can prevent wage garnishments and attachments – Letting creditors know that you’re in a debt settlement process provides assurance they are going to be paid a least some of their money. Creditors are unlikely to initiate any legal action while a settlement is under way.
* Debt elimination – Outstanding balances can be reduced by 40 to 70%, depending on the creditor. On average, the collective accounts in a settlement will be reduced by 50%.
* Added security for secured assets – Reducing payments and eliminating a portion of unsecured debt relieves pressure on secured assets. Debt settlements, for example, are being combined with loan modifications to help homeowners reduce their total payments toward debt and improving the chances of getting approved for new mortgage terms.
* Complete payoff of debt balances – After the debt reduction, payoff schedules are flexible but generally last no longer than 48 months. The same accounts maintained with minimum payments could take over twenty five years to pay off.
* Faster improvement of credit scores – The settlement of accounts allows for borrowers to begin the process of re-building their credit scores faster than bankruptcy which can remain on a credit report for ten years and stay on the public record indefinitely.
Debt settlement/negotiation is becoming increasing popular with struggling consumers because of its advantages over every other form of debt relief including bankruptcy. Consumers should still familiarize themselves with all forms of debt relief before making a decision. The best way to sort through the options is to work with an attorney with experience in all forms of debt relief to determine which will deliver the best outcome. Getting on the road to financial recovery is that simple.
Watch the video related
Income-Based Repayment is a new way to lower your federal student loan payments starting July 1, 2009. It caps monthly payments and forgives remaining debt and interest after 25 years. And if you’re a teacher or work in government, nonprofit, or other public service jobs, you could have your federal loans forgiven after just 10 years. This animated video explains the programs and tells you where to go for more information: www.IBRinfo.org.
Help answer the question
Will my past debts become a burden to my fiancee once we are married?
I am currently engaged to my fiancee. I have a foreclosed house and a car that got repoed, I owe back taxes on the property and thousands on the car not mention other credit card debts.
My question is, when I get married, will my past debts NOW become my wife's debts? Will she become responsible for the money owed?
debts
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14 Comments
August 3rd, 2009 at 4:38 am
Student loans are the biggest ripoff. And I wish canada had something like this, ours even follow us through bankruptcy.
August 3rd, 2009 at 4:54 am
Well Debt settlement is pretty complicated. Plus they are going to throw in a bunch of fees and hidden charges (so that they get their cake and eat it too) and things of that nature. Depending on how much debt you have its probably going to be a big bill bigger than all of your bills combined even. Bankruptcy is probably easier. You only have to pay once and after its all said it done your bad credit and debt is TOTALLY wiped away with no gimmicks. But when filing bankruptcy MAKE SURE you have a great lawyer and if you have property make sure its protected. Once you file bankruptcy all the companies you know will try their hardest to get their money anyway they can. Whether it be trying to take your land or your valuables. If you have a good lawyer it won't be so scary. I Advise you not to file chapter 13 bankruptcy but Chapter 9 its much easier and less hassle. If you really want to know more about bankruptcy most bankruptcy lawyers have Free consultations. They tell you everything you need to know , the pros the cons, what will happen when you file etc. If you don't like the way bankruptcy sounds try the Debt settlement.
August 3rd, 2009 at 5:07 am
The person who created this animation deserves to have their job. Awesome work
August 3rd, 2009 at 5:50 am
I struggle to stay alive in this economy, I have a huge house payment 1643/month no job, can’t get a response from unemployment, living on credit right now, I have 81.8k in outstanding fed student loan. I am a BSEE from University of Colorado. Without this restructuring I will file Bankruptcy. The only hope is to go back to school and acquire even more debt. Hows that for opportunity cost you economists out there?
August 3rd, 2009 at 5:56 am
Hi David,
Great question! WATCH OUT: So far, there are inaccuracies in each of the previous answers. Let me clarify with straight answers:
First, let's look at bankruptcy…
There are two types of personal bankruptcy filings:
Chapter 7 and Chapter 13
Chapter 7 Bankruptcy is a "liquidation". This is where you usually pay an attorney anywhere from $800 to $3k+ to file and within a matter of months your debts are wiped out. This is the fastest way to get out of debt for the least total direct cost.
Chapter 7 stays on your credit report (listed with every account included in the bankruptcy) for TEN YEARS. It is public record for 20 years. Bankruptcy may have additional costs including limiting your credit worthiness (currently there are no mortgage loans available until 2 years after discharge), increased interest rates and fees, higher deposits required, disqualifying you for certain types of employment and more.
Chapter 13 Bankruptcy is a "repayment plan". It is a court-ordered repayment plan, usually 60 months. Any missed payments cause you to lose the protection of the courts and your creditors can then go after you.
Chapter 13 stays on your credit report (listed with every account included in the bankruptcy) for SEVEN YEARS AFTER the date of discharge, which is usually FIVE YEARS after filing, severely damaging your credit for A TOTAL OF TWELVE YEARS. Chapter 13 is also public record for twenty years and carries most of the additional costs mentioned for Chapter 7 above.
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) passed in October 2005 made sweeping changes to American bankruptcy laws. Many of the bill's provisions were explicitly designed to make it "more difficult for people to file for bankruptcy", especially Chapter 7.
Often, my clients tell me their estimates for repayment plans through Chapter 13 would require them to repay a higher percentage of debt over a longer period of time with a monthly higher payment than they could do otherwise through debt settlement.
Oh, and you may find this funny…
Some Bankruptcy Attorney friends of mine shared a story with me… about how a Chapter 13 Bankruptcy is like a "turkey dinner". You see, everyone is sitting at the dinner table; the judge, the attorney's, your creditors… Each with a bib on, fork and knife in hand, double fisted, drooling and licking their chops… And guess who's the turkey? In a Chapter 13, YOU are the turkey!
On a serious note…
Significant social, emotional and psychological risk is also involved in filing bankruptcy. Each of us must decide for ourselves where we stand on these levels.
Debt settlement on the other hand is the fastest way to be debt free for the least amount of money while avoiding bankruptcy.
There are many reasons to avoid bankruptcy at all costs.
Debt settlement is a legal, moral and ethical option for people in a financial hardship.
How does debt settlement affect credit?
This is a great question; deserving of a quality answer you can apply to your own situation.
I have written two articles that cover this in detail:
Debt Settlement – Doesn't it Hurt Your Credit Score?
http://ezinearticles.com/?id=1485577
Debt Settlement – Credit Advice & Tips For People With High Credit Scores
http://ezinearticles.com/?id=1485605
Also, this article is a great example of a real life situation where straight answers are given about bankruptcy vs credit counseling vs debt settlement…
Debt Settlement – How Nicole, a School Teacher With $55k in Credit Card Debt, Avoided Bankruptcy
http://ezinearticles.com/?id=1521598
If you do not qualify for Chapter 7 Bankruptcy, then avoid bankruptcy altogether and seek a competent debt settlement program with a law firm. This is, of course, if you are in a financial hardship and cannot pay off your debts on your own.
If you do qualify for chapter 7, then you really need a "strategy session" with a competent financial consultant who is unbiased to help you compare bankruptcy and debt settlement given your unique situation and goals.
If you like, I can refer you to BK attorney's nationwide for a free legal evaluation to see if you qualify. I can also provide quotes for top, proven, trusted debt settlement programs.
Hope this helps!
August 3rd, 2009 at 12:30 pm
how is prison these days? its looking good, 3 meals, roommate, clothes. might not be so bad.
August 3rd, 2009 at 5:34 pm
I graduated in 2004 with $46,000 in debt from my undergraduate degree… I currently work 50+ hours a week for 9.50 per hour… At least I am paid by the hour… If I took the salary they offered me, I would only be earning about 9.00 per hour… Never Mind the TAXES they take out of my paycheck…. Today, in 2009… Companies are filled with college graduates who work for NOTHING with ZERO benefits for 50+ hours per week and they all OWE $40,000+ for student loans…
COLLEGE IS A SCAM!!!!!
August 4th, 2009 at 2:13 pm
tobasco 77 > College is not a scam, PAYING for college is.
August 5th, 2009 at 6:44 am
Here are your answers.
1) Settling is better because settling stays for 7 years from date of first delinquincy while bankruptcy stays for 10.
2) If the statute of limitations in your state (in texas it is 4 years) have passed you can literraly negotiate (based on your skills) to have the payment 50%, 25% or even 10% of the original amount. Even before the SOL you can negotiate but I advise against it as the collectors will threaten to sue you and you dont have that much leverage.
3) If it has gone to collections, I suggest collections since the bank has already marked it off as a bad debt. Very important is to get a deletion letter.
http://www.creditliberty.com/credit-repair/pay-for-deletion-letter.html
Check your credit report to ensure there are no multiple entires for the same account. If the bank has sold the debt to collection, you can have it removed marked as duplicate. Then talk to collections, negotiate and settle and get a deletion letter. Doesn't matter if you pay in full, 50%, 25%. GET THAT DELETION LETTER!
4) Settlement will have lesser and lesser impact as time goes on and will be removed 7 years after date of first delinquincy reported by the bank on the credit report. NOTHING resets that period. So if your credit shows delinquint in 2003, in the year 2010 it will be removed. When you file bankruptcy in 2008, the bankruptcy will remain on your record till 2018! Now you tell me what is better?
5) No, it is default on a payment. Bankruptcy is chapter 7 or 11 and involves a lawyer and a judge who grants you bankruptcy!
August 5th, 2009 at 7:37 am
August 5th, 2009 at 8:45 am
Avoid bankruptcy unless it's a last resort. In this day and age, you may still be responsible for debits you are hoping to eliminate; and the damage to your credit is a disaster for years.
August 5th, 2009 at 6:21 pm
Good news. Good delivery.
August 6th, 2009 at 6:33 am
Salle Mae is calling me nonstop… I applied for a loan and a private one as well, but I didn’t get to finish my degree… I didn’t have enough to take another course and the lender won’t allow me to borrow anymore… Don’t understand this capitalism bullshit…
August 6th, 2009 at 3:25 pm
Forgive Student Loans now!!!!stop rewarding thieves in Wall Street!!!! The productive individuals in this society are hurting because of the ignorance of the ignorants with power.