What are the most direct methods to get out of debt?—Both debt settlement and bankruptcy are answers to the same problem – what are the most direct methods to get out of debt? However, each has its own set of benefits and drawbacks, making it difficult to choose the best option. If your obligations are so large that you can’t foresee paying them off, it’s important to weigh both possibilities while you work to improve your credit and financial situation.
Bankruptcy may be the quickest way out of debt, but it has a significant negative influence on your creditworthiness in the long run. A bankruptcy will be on your credit record for 7-10 years, severely limiting your ability to obtain a loan, own a credit card, or purchase a home. Bankruptcy, which is decided in federal court, either eliminates your personal debt or establishes a 3-5-year repayment plan for your creditors.
Differences and Similarities
There are two forms of personal bankruptcy: simple asset liquidation and restructuring. Both proceed via the judicial system, with the final decision being made by a judge. Both of these things become public record.
Debt settlement, on the other hand, is typically a private negotiation between someone representing you, such as an attorney or a debt settlement firm, and your creditors. Although debt settlement is a private transaction, it does appear on your credit record.
When deciding between Debt Settlement and Bankruptcy, you should weigh the advantages and disadvantages of both choices carefully. Neither option should be taken lightly, as both have consequences.
To begin, keep in mind that Debt Settlement is not the same as Debt Consolidation. Debt settlement is the practice of paying your creditors lump amounts in exchange for a debt reduction.
Please keep in mind that the accompanying chart cannot explain the intricacies as well as consulting with an attorney can. Asset protection, for example, is not restricted to non-bankruptcy solutions. Pre-bankruptcy planning is a concept in bankruptcy that, if done effectively, will prevent or reduce the loss of assets.
Similarly, if you have an asset that you must keep at all costs and that is not protected by a bankruptcy filing, you should investigate a debt settlement option. Remember that Debt Settlement will require you to have access to funds in order to make a payment in a reasonable amount of time.
Pros of Debt Settlement
Reputable debt settlement firms may be able to reach reasonable agreements:
If you hire a good organisation with industry connections, you might be able to secure a fair settlement offer.
You can avoid the legal procedure of bankruptcy:
Because a debt settlement is a private agreement (unlike bankruptcy, which is public record), it’s not something that will show up in job interviews or other instances where your past could be investigated.
Debt settlement has a slight advantage over bankruptcy in terms of credit damage:
Though debt settlement might cause your credit score to take a big knock during the months that you stop paying your payments, after your debt is settled, it will remain on your credit record for seven years—shorter than the 10 years for Chapter 7 bankruptcy
Is it a good option for you?
Simply put, if you have a pile of unmanageable debt and bankruptcy isn’t an option because you don’t qualify or can’t face the stigma, debt settlement maybe your best alternative.
That’s especially true if you have access to large quantities of money (the do-it-yourself approach) or the fortitude to hold creditors at away while you save up enough money to make viable proposals.
Pros of Chapter 7 Bankruptcy
You may nearly completely eliminate your debt:
Most unsecured obligations, such as credit cards and medical bills, are totally dismissed under Chapter 7, providing you a fresh start financially. Balances owing on secured debt, such as home and vehicle loans, can also be discharged, however this requires the asset to be surrendered.
Collection agencies will no longer pursue you:
Almost all collection calls will stop in both types of bankruptcy.
You don’t have to pay taxes on debt that has been discharged:
Bankruptcy does not count debt cancellation or reduction as taxable income.
Pros of Chapter 13 Bankruptcy
- Protects your assets, such as your home and automobile, against foreclosure and repossession in order to pay off obligations.
- After you’ve made all of your due payments, you’ll get a debt discharge.
- You don’t have to pay taxes on debt that has been forgiven.
- You must wait two years before filing again, which is six years fewer than under Chapter 7.
When to consider Bankruptcy
Chapter 7 is best suited to those who:
- Own no real estate or other valuables.
- Insufficient liquid financial assets (stocks, bonds, mutual funds).
- Have a household income that does not exceed the state median for family size, which is the income limit under Chapter 7.
- Have a lot of credit card debt, personal loans, and medical bills? They’ll all be wiped clean.
At the end of the day deciding whether or not to file bankruptcy or go the debt settlement route will be based on the individual facts of each client. But what is most important is to explore ALL of your options and not get pushed into one or the other from a salesman.