If you're trying to decide if you should file bankruptcy or whether you should use debt settlement instead, you should be aware of the pros and cons of each choice. For some, bankruptcy will be their best option; for others, debt settlement will be their program of choice. Here's an unbiased look at both options.
For anyone considering debt settlement or bankruptcy, there must be a financial hardship before either will make sense to pursue. A financial hardship is the reason a person cannot pay their debts and why they would need to pay less than owed (or nothing at all).
The worse off a person is financially, the more attractive a bankruptcy will look, because it allows a fresh start. That is its purpose. When someone is in such financial trouble that there is no possibility of recovery without a debt forgiveness then either debt settlement or bankruptcy will be a choice; the extent of need will determine the best choice.
Bankruptcy isn't always like this, but it can feel like it.
This article is NOT a substitute for legal advice. I am not a lawyer. Consult an experienced bankruptcy attorney for detailed advice in your particular situation.
With that said, there are some general points that can be made for bankruptcy:
For individuals, the most common types of bankruptcy are called Chapter 7 and Chapter 13. Most people, if they are going to file for bankruptcy, will file for Chapter 13.
In Chapter 13 bankruptcy, the person will submit all their debts, income and living expenses to a "bankruptcy trustee" who decides which creditors get paid, how much, and how quickly. A Chapter 13 bankruptcy program is finished within five years. Usually all the debts get repaid, at least mostly, and to the full extent the person is capable of repaying them. If you file a Chapter 13 bankruptcy petition, expect to meet with representatives of your creditors and explain to them why you cannot pay them now and answer whatever financial questions they ask you.
The US Court System has details about qualifying for Chapter 13 on its website at http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter13.aspx.
For those who qualify for Chapter 7 bankruptcy, the difference is that qualified debts can be forgiven and no repayment is demanded. (Mortgage debt is not forgiven, nor is tax debt.) You go through the same general "trustee" process, are questioned by your creditors, and explain your situation. The trustee will collect and sell your nonexempt assets to satisfy your creditors' claims. If the Chapter 7 bankruptcy is approved, your assets are sold, your debts are considered satisfied, and you walk away from them and start over financially.
You can find details about Chapter 7 bankruptcy on the US Court System's website at http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter7.aspx.
The alternative described in this article, debt settlement, is a negotiated payoff at a lower-than-owed amount, and normally is done as a lump sum of money (although monthly payments for three or six months is also common). The debt is considered "paid in full" or "paid as agreed" or "paid" by the creditor, and the process is normally completed within a few months. Then you can get on with your life financially.
Pros and Cons
Collection action stops
For Chapter 13, you can renegotiate past-due mortgage payments and not lose your home to foreclosure
Difficult to qualify for Chapter 7, forcing you into Chapter 13 debt repayment plan
Intrusive to personal finances
Bankruptcy becomes public record
Reduces your credit score the most of any other action
Remains on your credit report for 10 years
May impact future employment (commonly asked on application)
May impact licensing (insurance, securities, real estate to name a few)
Generally requires a lawyer, and can be expensive
Debt Settlement Pros:
You can do it yourself
You have more control
You repay the reduced debt per a new agreement with the creditor
You can be done quickly (within a few months)
Debt Settlement Cons:
Reduces your credit score
Remains on your credit report for several years
Generally requires cash to pay off the negotiated debt amount within a short time frame
Based on these pros and cons, you can decide which sounds more attractive and get more information about it before you move forward. If you want more information about several other options for resolving your debts, please purchase my book and find out about five alternative solutions for your debts.
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