Debt Settlement vs Bankruptcy
The processes of debt settlement and filing for bankruptcy represent two viable alternatives for an individual buried under insurmountable debt.
While choosing between one or the other may be akin to the feeling of being caught between a rock and a hard place, there are positives to be accrued in either approach. In this article, we will describe both processes while comparing and contrasting the virtues and drawbacks of each
Time and again, I did not know how to handle my debt
Time and again, I did not know how to handle my debt. Even when I paid my credit cards off, a few months later I was back in the same situation. But this year is different. I contacted United Settlement...
Business debt relief is what I needed when I contacted the United Settlement crew
Business debt relief is what I needed when I contacted the United Settlement crew. They are committed to helping people like me who requires more help with business debt problems. I had several loans out...
Student loan debt was the reason that I reached out to United Settlement
Student loan debt was the reason that I reached out to United Settlement. I had about 200K plus in student loan debt for my business degree. I recognized that I had to do something when I struggled to make...
There is nothing worse than falling ill and then having to deal with super expensive medical bills
There is nothing worse than falling ill and then having to deal with super expensive medical bills that you really do not have the patience or experience to handle. I was pleased with my experience with...
I took out a few personal credit cards to open my boutique
I took out a few personal credit cards to open my boutique. When than money ran out, I went on to take out more loans for my business. However, this quickly turned into a disaster. Today, I now have a mountain...
Who knew that auto loans were so negative for your credit lines
Who knew that auto loans were so negative for your credit lines? Especially, if they are not paid off right away. As a married couple, we had vowed to keep auto loan debt at bay. But, we found ourselves...
I didn’t have a ton of debt when I contacted United Settlement
I didn’t have a ton of debt when I contacted United Settlement, but what I wanted from them was some information about how to handle my debt management. I knew that I needed some more information to get...
Federal student loans were the reason I ended up at United Settlement
Federal student loans were the reason I ended up at United Settlement. I had about $200K to pay back and I was not quite sure where to tackle that debt once I got out of school. But I reached out to that...
Everyone knows how horrible student loans are
Everyone knows how horrible student loans are. For me and my family, they had become more than just an annoying monthly bill. They had taken over our lives. That’s why I decided to take action and find...
I wanted to be more informed about my own personal and business debt
The number one reason I chose to contact United Settlement was I wanted to be more informed about my own personal and business debt. When you have credit card debt, it can be extremely frustrating. Especially...
I cannot believe I was finally able to find a company to actually help me pay off my debt
I cannot believe I was finally able to find a company to actually help me pay off my debt! I thought I would forever be chained to debt. But United Settlement offered me multiple solutions for paying off...
What your money can do for you.
The great reviews that you have thanks.
Dealing with high interest auto loan debt was difficult for me and my wife
Dealing with high interest auto loan debt was difficult for me and my wife. We thought we got a good deal, but it actually was a horrible loan. So, we reached out to United Settlement, and they got to work...
No one really wants to go bankrupt, and neither did my family
No one really wants to go bankrupt, and neither did my family. But fortunately, we did not have to go that route. It was our last resort, but United Settlement helped us figure out a way around bankruptcy...
I had been through about 5 different credit counseling agencies before I found United Settlement
I had been through about 5 different credit counseling agencies before I found United Settlement. I had read through their reviews and made the decision to move forward with them. I also was so impressed...
Save time and money
Just what I needed, already had a company I was working with and I switched because I was able to same some money. Brian and Alfred were really nice and helpful
As a business facing some unwanted financial difficulties
As a business facing some unwanted financial difficulties, we were at a loss for what to do next when our debt started to soar. We took a closer look at our financial situation by contacting United Settlement....
I had no clue how to create a debt management plan
I had no clue how to create a debt management plan and in fact, I didn't even know what a debt management plan was. Fortunately, I reached out to United Settlement before I had too much debt to tackle....
Being burdened by debt is one of the biggest struggles we faced as a family
Being burdened by debt is one of the biggest struggles we faced as a family. But these people at United Settlement were very helpful in deciphering the different debts we had and then coming up with a debt...
Student loan debt was my worst enemy before I ran into United Settlement
Student loan debt was my worst enemy before I ran into United Settlement. I really thought I would just have terrible credit for the rest of my life because I will never get out from underneath it. It was...
The Basics of Debt Settlement
Debt settlement takes place when a debtor successfully negotiates a payoff amount for less than the total balance owed on a debt. This lower amount is agreed to by the creditor or collection agency and is fully documented in writing. Ideally, this lower negotiated amount is paid off in one lump sum, but it can also be paid off over time.
Even though it may seem surprising that banks would settle for less than what is owed, the statistical certainty that not all borrowers will actually pay back is built into a bank’s carefully formulated lending model. Understanding this reality makes it easier for many debtors to pursue debt settlement.
The process of debt settlement focuses primarily on unsecured debt, such as credit cards. Additionally, creditors are more likely to settle once a debtor has already demonstrated an inability to pay.
Therefore, if you’ve already fallen behind on payments by four or five months, it could be the ideal time to begin negotiating with creditors for the best settlement, as the bank still controls your account but also knows that the clock is ticking closer to charge-off, the point at which it would likely never recover anything from the delinquent account again.
Consequences of Bankruptcy
Bankruptcy should not be entered into lightly without an understanding of its long-term consequences. A Chapter 7 bankruptcy will remain on a credit report for ten years from the filing date, and a Chapter 13 bankruptcy will remain on a credit report for seven years from the filing date.
Either can impede a borrower’s ability to obtain new lines of credit, and potential landlords and employers may frown upon this aspect of a financial history. It is likely that a bankruptcy discharge will lower a FICO credit score toward the low 500s.
However, with careful planning and responsible financial behavior, particularly in the first two years following a bankruptcy discharge, it is possible to rebuild a FICO credit score to healthy levels following bankruptcy.
Debt Settlement vs Bankruptcy
Should I Pursue Debt Settlement or Bankruptcy?
The choice between debt settlement and bankruptcy will depend upon your aggregate debt level, the nature of your debt (unsecured vs. secured), your income, and additional considerations such as potential tax consequences and credit score impact.
For instance, even if your total debt level is high, if most or all of the debt is unsecured, debt settlement may be your best option. However, if you are carrying onerous secured debt (such as a home mortgage or auto loan) as well, pursuing bankruptcy could be the better option.
Regarding discretionary income, if you are able to put aside a certain fixed amount each month for an eventual settlement payment, then you can consider debt settlement. However, if you’re finding it unrealistic to accumulate any savings after accounting for basic necessities each month, then pursuing bankruptcy may be better. Do note that you will still need to meet certain income conditions to qualify for filing either Chapter 7 or Chapter 13.
Next, if you’re looking to reduce your debt burden related to certain private student loans (a form of unsecured debt), then debt settlement could work in your favor, as it is difficult to discharge private student loans through bankruptcy. Finally, regarding tax consequences, debt settlement savings in excess of $600 are considered a federally taxable event. However, this is not the case with bankruptcy, as discharged debts are usually not considered taxable income.
If you find yourself saddled with too much debt, regardless of how difficult things may feel today, there is a pathway out toward financial wellness. Regardless of whether you choose to pursue debt settlement or bankruptcy, you can effectively position yourself to secure a new unsecured credit line within two years of completing either. Contact us here at United Debt Settlement to discuss your various options as they relate to your specific financial situation.
Debt Settlement vs. Bankruptcy FAQs:
Is it better to file bankruptcy or settle debt?
The choice between debt settlement and bankruptcy will depend upon total debt level, the nature of the debt (unsecured vs. secured), income levels, and additional considerations such as potential tax consequences and credit score impact. Even if total debt level is high, if most or all of the debt is unsecured, debt settlement can be the better option. If you are carrying high levels of secured debt (such as a home mortgage or auto loan), pursuing bankruptcy could be the answer. However, bankruptcy should not be entered into lightly without an understanding of its long-term consequences. A Chapter 7 bankruptcy will remain on a credit report for ten years from the filing date, and a Chapter 13 bankruptcy will remain on a credit report for seven years. Either do significant damage to a FICO credit score and can impede the ability to obtain new lines of credit, and potential landlords and employers often frown upon this aspect of a financial history.
How many times can you file bankruptcy?
There is no specified limit to the number of times that someone may seek Chapter 7 or Chapter 13 bankruptcy protection. However, there are restrictions that govern the frequency with which someone may file, and these restrictions depend upon the previous type of bankruptcy filed and the filing date. For individuals who have previously filed Chapter 7, they must wait another eight years to again file Chapter 7, or wait four years to file Chapter 13. For individuals who have previously filed Chapter 13, they must wait another two years to again file Chapter 13, or wait six years to file Chapter 7.
How long does it take to file bankruptcy?
A Chapter 7 bankruptcy typically takes up to six months to complete, with a bankruptcy discharge granted within four months of filing in most cases. A Chapter 13 bankruptcy is different in that it typically involves a 3 to 5 year repayment plan.
How much should you be in debt before filing bankruptcy?
There is no minimum amount of debt required to file bankruptcy. The question of how much debt someone has is important in deciding whether to file bankruptcy, but this should be taken in context with additional considerations such as income level and whether it can ultimately prove affordable to pay back debts. Alternative forms of debt relief that include debt settlement, debt consolidation and debt management plans should be investigated prior to making any decision to file bankruptcy, given the long-term consequences of doing so.
Can you file bankruptcy twice?
Yes, an individual may file bankruptcy twice – in fact there is no specified limit to the number of bankruptcies that someone can file during a lifetime – although there are restrictions involving how much time must elapse between successive filings.