Most individuals struggling with an overwhelming amount of debt are faced with two options: Bankruptcy or Debt Settlement. Understanding the advantages and disadvantages of each will allow you to make an informed decision about what is best for your situation.
WHAT IS BANKRUPTCY?
Bankruptcy is a legal process allowing you to get a financial fresh start by discharging most debts. Regardless of the chapter of bankruptcy you file, the end result is the same: a discharge of your personal liability from your debts. The discharge order in a bankruptcy case is what prohibits creditors from attempting to collect from you. It is a permanent injunction telling your creditors to stay away.
WHAT IS DEBT SETTLEMENT?
Debt settlement is an agreement between you and your creditors in which your creditors accept less than the full balance as payment in full. Typically, a debt settlement company will help you negotiate a payment plan with your creditors. You will make monthly or bi-weekly payments to the debt settlement company, who will make payments to your creditors on your behalf.
There are some factors you should consider before attempting debt settlement. First, debt settlement will likely result in a negative entry on your credit report.
Second, a debt settlement may result in a tax liability. If you originally borrowed $10,000 from a creditor and later agree to settle the debt for $4,000, the difference between the original amount borrowed (not including accrued interest and fees) will be considered taxable income to you; in this case $6,000. The creditor will send you and the IRS a 1099 for the $6,000 that was cancelled. If you are settling a large amount of debt, this can be quite problematic, as you now have a tax liability to the IRS. There is no tax consequence for debt discharged in a bankruptcy.
Third, a debt settlement program offers no legal protection from your creditors. Some creditors may refuse to negotiate with you leaving you vulnerable to lawsuits and wage garnishment. Creditors that agree to participate in a debt settlement can cancel the agreement at any time. It is not uncommon for individuals to attempt a debt settlement program for a year or more, only to be sued by an uncooperative creditor. Once the lawsuits start, it is virtually impossible to finish a debt settlement program. Bankruptcy on the other hand, legally forces your creditors to stop all collection actions.
HOW MUCH TIME DOES A DEBT SETTLEMENT PROGRAM TAKE?
Generally, most debt settlement programs take about 18-48 months. The time frame will depend on the amount of debt you have, the number of creditors, and how much disposable income you have each month to make payments.
HOW MUCH TIME DOES A BANKRUPTY TAKE?
The length of time for a bankruptcy depending on what chapter you file. If you file a Chapter 7 Bankruptcy, you will likely receive a discharge in about 4-5 months. In a Chapter 13 Bankruptcy, you will receive your discharge after 3-5 years.
COST OF DEBT SETTLEMENT VS. BANKRUPTCY
The cost of debt settlement is completely dependent on what you or your debt settlement company can negotiate with your creditors. Typically, debt settlement programs will negotiate a settlement amount of 40%-60% of the debt amount. However, you may have to make a large upfront payment and you also must be aware of any possible tax consequences, as that will only add to the cost.
The filing fee for a Chapter 7 Bankruptcy is $338.00 while the filing fee for a Chapter 13 Bankruptcy is $318.00. The attorney fees will vary depending on the chapter of bankruptcy you file, the complexity of your case and the are in which you live. At Treguboff Law, PLC we can help you file a Chapter 7 or Chapter 13 Bankruptcy case for little to no money down. In a Chapter 7, you will make monthly payments for as little as $55 per week after you case is filed. In a Chapter 13, most of your attorney fees are paid by your trustee out of the plan payments you make to the bankruptcy court.
CONTACT TREGUBOFF LAW, PLC FOR ADVICE ON BANKRUPTCY
If you are struggling financially because of a job loss, or unexpected illness, or some other life event, bankruptcy may be the best option. You should discuss your options with an experienced bankruptcy attorney to discuss your options.
If you have any questions about Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, contact Treguboff Law, PLC today. The call and the advice are free.