Debt Settlement vs. Bankruptcy

Debt settlement is a less invasive option vs Bankruptcy but Bankruptcy may be a better option.   The key reasons to consider debt settlement over Bankruptcy is:

  1. You make too much money for Bankruptcy;
  2. You want to exhaust all options first;
  3. You don’t qualify for Bankruptcy for other reasons.

Bankruptcy is certainly an easier way to get rid of debt but debt settlement offers benefits too.

What is Debt Settlement?

Debt settlement should not be confused with debt consolidation.  With debt consolidation, you often borrow money against your home or other substantial asset to pay off all of your debts. With this option, you are turning unsecured debts into a secured debt and risking losing the collateral if you cannot pay the loan payments.  The other option is paying a debt consolidation company a monthly payment for the company to negotiate with your creditors to work out a repayment plan through the debt consolidation company.  This option typically involves expensive fees and high costs with unfavorable terms.

Debt settlement is a process whereby you negotiate with your creditors to pay a lump sum payment in exchange for the creditor reducing your debt.  For example, you agree to pay a lump sum payment equal to 50% of the total amount owed on the account and the creditor agrees to “write off” the remaining 50% you owe on the account.

How is Bankruptcy Different from Debt Settlement?

If you choose to file a bankruptcy to resolve your debt problems, your creditors do not have a choice whether to participate in the bankruptcy case.  Bankruptcy law prohibits creditors from continuing collection efforts including repossessions, foreclosures, wage garnishments and collection lawsuits once a bankruptcy case is filed.  With debt settlement, some of your creditors may choose not to work with you but this is not the case in a bankruptcy.

With a bankruptcy, the debt that is discharged is not reported as income on your tax returns.  When you complete the bankruptcy case, you are no longer legally responsible for the repayment of discharged debts.  Creditors are forever barred from taking any action to collect discharged debts, must report the debt as discharged in bankruptcy with a zero balance on your credit report and cannot report the discharged debt to the IRS as income.

Bankruptcy can protect the equity in your assets from creditors.  Debtors are permitted to claim exemptions in the equity of various assets.  Unlike in a debt settlement where you may borrow money against your home to pay lump sums to your creditors, you can protect the equity in your home while still getting rid of your debts.

In many cases, your attorney can file a bankruptcy case very quickly in order to stop creditor harassment and collection efforts.  You do not need to contact creditors in advance to try to work with the creditors prior to filing bankruptcy. You file your bankruptcy case and the court sends notice of the bankruptcy filing to each of your creditors.  Debt settlement can take months of hard work and may not result in settlements with all creditors.

High Income

Often the decision is obvious because you don’t qualify for Bankruptcy due to high income.   If your income is far above the means test then debt settlement may be the way to go.  We can examine your income to determine if you pass the means test or not.

Choosing the Right Debt Relief Solution for You

Before deciding which debt relief option is best for your situation, you need to know the facts.  Each person’s financial situation is different; therefore, the best solution for someone else may not be the best solution for you.  Deciding between bankruptcy and debt settlement will depend on the unique facts of your situation.

If you are struggling with overwhelming debt, contact Weston Legal, PLLC to discuss your bankruptcy options.  You have options for dealing with your financial problems and we will help you find the solution that is best for you.

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