How Does Bankruptcy Work
There are two types of bankruptcies for consumers: Chapter 7 and Chapter 13. Under Chapter 7 bankruptcy, the court typically requires that you sell off some of your assets and pay off what debt you can, with the remainder discharged.
Chapter 13 bankruptcy, in contrast, allows you to keep your property but requires you to repay all or a portion of your debt over a three- or five-year period. Once you’ve completed the repayment plan, any remaining balances included in the bankruptcy are discharged.
With both types of bankruptcy, most forms of unsecured debt can be discharged, including credit card debt. Others types of dischargeable debt include medical bills, utility bills, judgments, certain tax debts and more. In most cases, though, you won’t be able to discharge a mortgage loan, student loans, child support and alimony, among others.
Bankruptcy is a last-resort option, and it’s important to consider other options and pay off your credit card debt in other ways first.
Debt Relief Vs Bankruptcy
7-minute readSeptember 21, 2020
Medical bills after an accident, divorce, a lost job there are endless ways that you can fall into debt. A debt relief program can help you restructure or reduce what you owe if you struggle to keep up with your payments. Bankruptcy might be the best solution for you if youre deep in debt with no way out. How do you know which strategy is best?
Debt relief and bankruptcy can both help you tackle debt and get back on the path to healthy finances. Lets take a closer look at the differences between debt relief and bankruptcy so you can decide which option is right for you.
How Do You Find A Good Debt Settlement Company
If you are looking for a good debt settlement company, you could ask your friends and family if they have any recommendations, ask your financial advisor, or look for online reviews. For example, Consumer Affairs magazine publishes a reliable list, and the Federal Trade Commission offers information about both credit counseling and debt settlement companies.
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Chapter 7 Bankruptcy Vs Other Debt Relief Options
Both Chapter 7 and other debt relief options as , debt settlement companies, or debt settlement services have pros and cons that you need to consider. For some individuals, filing Chapter 7 may be the best way to get rid of debt. However, there may be situations in which another kind of debt management plan might provide the same or better benefits.
There are many different types of debt relief. Many people base their decisions on how bad their situation is and if they think they can climb out of it. If you think debt relief is the right decision for you, itâs important to choose the option that sets the most achievable goals, so you can get debt free.
Letâs compare a Chapter 7 bankruptcy case to other debt relief options to help you decide if filing Chapter 7 bankruptcy is a better option compared to other kinds of debt settlement plans.
In Bankruptcy You Have No Tax Liability For Discharged Debt
Unlike debt settlement or debt consolidation, you will pay no income tax on debt that is discharged in Chapter 7 or Chapter 13 bankruptcy.
Please take note of this important caveat: the information on this page is not legal advice, nor is it intended to be legal advice. The purpose of this page is merely to introduce you to some basic concepts so that you can have an informed discussion about your options when you attend your consultation. If you need a Philadelphia bankruptcy attorney, give us a call. We look forward to meeting with you and helping you get free of bills.
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Cons Of Debt Settlement
- While youre building your debt settlement war chest, collection contacts calls, mail, email will not cease, and they will not be polite.
- If your debt to any one lender is substantial $5,000 or more you might get sued, and if you lose in court, your wages could be garnished and/or your assets seized.
- Beware of false promises. The Federal Trade Commission lists some warning signs: upfront fees required promises of a new government program that bails out credit card debtors any sort of guarantee. There is no law saying the creditor must accept your offer.
- Your credit score will take a beating, and the settlement will remain on your account for seven years from the date of the initial delinquency.
- The IRS considers the amount of forgiven, canceled, or discharged debt as regular income. You will receive a 1099-C form and, unless you meet an exclusion or exception , youll be on the hook for taxes to be paid by April 15 of the year following the settlement.
- Because some creditors refuse to work with debt settlement firms, you still might wind up with ballooning, fee-burdened debt that forces you to file for bankruptcy.
- You may drop out before the program is complete, leaving you with larger debts.
- Its highly likely creditors with whom you settle will close your account completely.
Why People Choose Between Debt Relief And Bankruptcy
When a person canât pay their debts, creditors can become extremely demanding in their attempts to collect debts. In some cases, debt collectors may harass individuals for payment of debts. Of course, if you don’t have enough income to make all of your monthly payments then what the debt collector that is calling you may suggest, your financial situation may simply make a payment plan to get back on track impossible.
Some debt collectors and creditors may push you toward a specific debt relief option. Keep in mind, though, that their recommended debt relief option may not be in your best interest , but it could be in the best interest of the creditor.
Before you decide to use any debt relief program, you need to carefully review all of your options to get out of debt. Some debt settlement programs could cause you to get into additional debt problems if you are not careful.
You should only make a decision about how to get out of debt after weighing the pros and cons of each debt relief option.
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How Much Does Bankruptcy Cost Get Informed Before You Decide
If youre struggling with debt, it might be time to take actionbut figuring out the right debt solution isnt easy. Debt consultants at reputable debt relief companies will take time to understand your individual needs and help you determine the best debt relief option for you, whether its debt relief, bankruptcy, or another solution. Our Certified Debt Consultants can help you find a solution that will put you on the path to a better financial future. Find out if you qualify for our debt relief program right now.
What Can I Keep In Bankruptcy
In addition to minimum amounts of home or auto equity, the following is a list of assets that are generally exempt from bankruptcy. After all, the process does not intend to take away a persons dignity. Instead, its to help them recover from extreme financial hardship. Keep in mind, the rules surrounding these items can vary from province to province.
- Food & Clothing
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Is Debt Settlement Better Than Bankruptcy
The short answer is no. Its almost always worse for you. We actually discuss the credit impact of bankruptcy in more depth in our article what does bankruptcy do to my credit?
While it sounds great to settle your debt for pennies on the dollar it rarely works out that way. More often than not, debt settlement companies charge you large amounts of money to get no results. There are a number of lenders that will not negotiate with you regardless of what any debt settlement company tells you.
Many times people seek this option to avoid negative credit score impacts. Unfortunately, your credit will almost always suffer more from debt settlement than from bankruptcy. Debt settlement results in more negative items and late payments. Bankruptcy removes those items and leaves only the bankruptcy itself behind. Bankruptcy also offers a far quicker credit rebound.
Additionally, youll likely have to deal with being sued while in debt settlement.
I have too many clients that came from unhappy debt settlement programs only to file bankruptcy anyway. Why not start there and avoid the hassle and save yourself some money? When considering bankruptcy vs. debt settlement, bankruptcy wins in just about every case.
What Happens To A Settlement I Receive After Bankruptcy
Although a filer can keep most types of property acquired after filing, settlement proceeds are an exception. Keeping the settlement will depend on: whether its Chapter 7 or Chapter 13 bankruptcy. When you file for Chapter 7 bankruptcy, almost all property you own becomes part of the bankruptcy estate.
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When Does Debt Settlement Make Sense
If you have only a small amount of debt, or the amount it would take to settle your debt is less than the amount you would pay in chapter 7 or 13 bankruptcy, debt settlement might make sense for you. However, this scenario is rare, and most people will save money and time and restore their credit rating much more quickly by filing for bankruptcy protection.
If you are considering using a debt settlement company to help clear up debt, consider scheduling a free consultation with an experienced bankruptcy attorney like Barbara Craig to get an alternative point of view. Barbara offers free bankruptcy consultations and can you help decide if bankruptcy or debt settlement is best for you. Contact attorney Barbara Craig now.
Making The Final Decision
In summary, bankruptcy erases debt in exchange for the surrender of assets and regulated payments while debt settlement is an arrangement to repay less than you owe.
If you cant afford to pay your debt in full, consider talking to a Licensed Insolvency Trustee about your debt relief options.
A consumer proposal is filed with a Licensed Insolvency Trustee. As a federally licensed and trained debt expert, a Licensed Insolvency Trustee is a good alternative to working with a debt settlement company.
They can help you compare bankruptcy vs debt settlement vs a consumer proposal. Contact us today for a free, no-obligation consultation.
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Debt Settlement Usually A Bad Alternative To Bankruptcy
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Debt settlement isnt the Wild West industry it was a decade ago, when people routinely paid hefty upfront fees to companies that failed to deliver any relief.
Thanks to increased regulation and enforcement, the much smaller number of settlement companies that remain often do what they promise: persuade at least some of a borrowers creditors to forgive part of the debt, typically in exchange for a lump sum payment.
Several people Ive interviewed lately reported positive experiences with debt settlement, so I decided to take another look at the industry. It turns out that hiring a negotiator could be a reasonable alternative to bankruptcy for some. But debt settlement is not as consumer-friendly as the industry presents it, and some of the people who praised the companies didnt fully understand their alternatives or the longer-term consequences of settling debt.
What Are My Debt Relief Options
That said, going through with bankruptcy is not the right option for everyone. For others, there are debt relief options. While debt relief is a broad term, theyre typically two options to choose from. You can either choose a debt management plan or opt for a debt settlement program. Weve outlined the specifics for you below.
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Can You File Bankruptcy If You Are In A Debt Relief Program
You can file for bankruptcy while youre pursuing debt relief. If you lose your income or youre forced to take on even more debt, you might have no choice but to file. However, this isnt usually recommended, especially if youve already begun making payments toward your debt. You wont receive any of the money you paid to your creditors back after you complete the bankruptcy process.
Youll also still need to complete the required bankruptcy steps even if youre already enrolled in a repayment program. This can include liquidating your assets and changing your repayment schedule. Any court order you receive will override or cancel agreements you made with your creditors. If you take a form of debt relief that harmed your credit, a bankruptcy can compound these effects and lower your score even more.
Carefully consider all your debt relief options before you choose a course of action. Theres no point in signing up for a debt relief program if you have no way to cover the repayments. Take a hard look at your finances, know exactly how much you owe and explore each of your options before you proceed.
Bankruptcy Or Debt Settlement Which Is Better
December 8, 2012 by National Debt Relief
We recently saw the movie The Life Of Pi. Most of its action takes place on a lifeboat thats shared by a young man and a tiger. As you might imagine, the young mans principal objective is to keep from being eaten alive. This made me think of people adrift in a lifeboat trying as hard as possible to keep from being eaten by their debt. If this is how you picture yourself or if you think of yourself as being crushed by a huge pile of debt, you may be considering either bankruptcy or debt settlement.
A chapter 7 bankruptcy
If you were to decide to file for a chapter 7 bankruptcy, this would discharge most of your unsecured debts including credit card debts, personal loans and medical bills. However, it would not discharge student loan debt, alimony or child support or past-due taxes. A chapter 7 is called a liquidation bankruptcy because its purpose is to liquidate your assets so they can be used to pay off your debts.
In contrast, debt settlement cannot discharge your unsecured debts but does offer a way to get out of debt in a reasonable amount of time and without stiffing your creditors. The way it works is that you hire a professional debt settlement company to contact your creditors and settle your debts. Then instead of paying your creditors you send the debt settlement company a check each month, which is deposited into a trust account. Once all your creditors agree to settle, the money is used to pay them off.
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If Youre Thinking Of Enrolling In A Debt Settlement Or Debt Consolidation Program You Should First Talk To One Of Our San Jose Bankruptcy Attorneys
The debt settlement industry advertises a lot. And they try to scare people away from the protections that consumer bankruptcy law provides by making filing for bankruptcy sound as though it were shameful or will ruin your credit for years to come.
The fact is debt settlement programs fail about two-thirds of the time according to the debt settlement industry itself. You dont have to take my word for it. The National Association of Consumer Bankruptcy Attorneys has published a white paper on the debt settlement trap citing the Better Business Bureau, statistics provided to state attorneys general, as well as reports published by the Federal Trade Commission, and the U.S. Government Accountability Office. Read more here.
Which Is Better Personal Bankruptcy Or Debt Settlement
If you conclude that you cant afford even the reduced payments negotiated from debt settlement, bankruptcy could be the best option. Personal bankruptcy comes in two varieties: Chapter 13 is essentially a payment plan that takes three to five years Chapter 7 clears your personal debts in 6-8 months, but comes with potential pitfalls.
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Issues With Debt Consolidation And Debt Settlement