Debt Settlement vs Bankruptcy
Weighing The Pros and Cons
One of the most common things we hear from consumers is that they want to look into a debt settlement plan so they can avoid filing for bankruptcy. In many cases, a debt settlement strategy can be a great way to avoid bankruptcy. Sometimes, however, bankruptcy might actually be the best option. When looking for the best way out of debt it is important to compare Debt Settlement vs Bankruptcy and go with the solution that makes the most sense for your specific financial situation.
Since all consumer situations are unique and the bankruptcy laws in many states are different, you will need to meet with a bankruptcy attorney that is licensed in your state in order to gain a complete understanding of what a bankruptcy filing would look like for you.
Bankruptcy Ch. 7
Filing a Ch. 7 bankruptcy is basically like wiping the slate clean, discharging all your debts and starting over. It typically only lasts a few months and provides for the most immediate form of debt relief than any other option.
The bankruptcy can stay on your credit report for up to 10 years, but you should be able to rebuild your credit to the point where you can borrow money for consumer items within a few years. Bankruptcy reform laws passed in 2005 have made it harder for many consumers to qualify for a Ch. 7 however.
Now, depending on your income and your assets, if you file for bankruptcy you may not be eligible to file for a Ch. 7 and would be required to file a Ch. 13 instead. Since all states are different you will need to speak with a bankruptcy attorney about which chapter would be appropriate for you.
Bankruptcy Ch. 13
A Ch. 13 bankruptcy is a much different animal than a Ch. 7. With a Ch. 13 you will be on a repayment plan for the next 3 to 5 years and might even be required to pay your entire debt in full. The goal of the Ch. 13 is to protect you from creditors but put a repayment plan in place that will pay back as much of the debt as possible.
Ch. 13 plans typically have a high rate of default among consumers because the monthly payments that they are required to pay can be very high. Many consumers compare Ch. 13 bankruptcy plans to getting an allowance as a kid. Over the 3 to 5 year plan, you are told what you can afford, what you can’t, and how much of your money you have to live on. If you get a raise at work, that must be reported, and the bankruptcy court will decide if you get to keep any of that extra money or if it all must go to your creditors.
Except in rare circumstances, a Ch. 13 bankruptcy is one of the least desirable debt relief solutions.
If you can’t qualify for a Ch.7 bankruptcy or would prefer to pay back at least some of what you owe based on your ability, a debt settlement approach is a great strategy to consider. Debt settlement allows you the ability to negotiate with your creditors for a lower principle pay off amount.
Since you must be behind on your debts before your creditors will agree to accept a reduced payoff, a settlement does have a negative effect on your credit, although, in many cases, the credit report will not be damaged as long as with a bankruptcy.
Debt settlement strategies work best for consumers who want to avoid bankruptcy or at least want to try and pay back some of their debt on flexible terms without just walking away from it. Having access to a reserve lump sum amount of money like a 401k or some other savings would be helpful, but isn’t necessary to successfully settle your debts.
As mentioned above, every consumer situation is unique and the best way to compare a Bankruptcy vs Debt Settlement is to contact a professional to review your situation and help you determine how either strategy may or may not work well for you.
To learn more about debt settlement, contact the professionals at Pacific Debt for a free Debt Reduction Estimate. Once we teach you about the settlement process, you can speak with a bankruptcy attorney and know for certain which option would be the best for you.