In today's post I will be speaking about the differences and benefits of debt settlement vs bankruptcy. They are both handy tools that the everyday person can use to get their financial situation back on track!
So I'm going to start with what debt settlement is, when it should be used, and why you should retain an attorney to help you with it if you were to choose to go this route.
In short debt settlement is just an attempt to negotiate on a debt that a company is saying that you owe. The debt can come from any source, (ie. light bill, water bill, student loan debt, car notes, gas bill, and even sometimes your credit cards and mortgage). Your goal with debt settlement is just to come to an agreement with the company to lower what you owe to a certain amount. Typically, the settlements are an agreed upon in one lump sum, and once its done its done. However, PLEASE BE CAREFUL. There should always be a signed agreement with these, and there are a ton of details you would need to work out on the front end of a potential debt settlement before it is ever presented to the company as a proposal. You will need to be prepared for the company to either reject you right out, or to haggle, and this is why it would be best to hire an attorney.
There are a lot of debt settlement agencies out there, and most are questionable at best. They charge large fees, and they neglect the finite details, which can often leave their customers holding the original bill, while still being on the hook for the entire amount of the original debt....plus additional fees. Hiring a lawyer to handle your negotiations can help you avoid a lot of pitfalls, and help you navigate your way to an agreement and an amount that could work best for you and the company. Furthermore, hiring a lawyer to help you with this can allow you to be strategic in how you handle your finances outside of the services provided. Often times where a lot of people get lost is that they go in for one service, have the service completed, but then are just left to their own dealings. Often times a simple followup call from a business minded attorney can inspire you to conduct your finances in a manner that will set you up for success years down the road.
Some people try to handle debt settlement themselves, and is it possible to do....yes! Is it wise to do, sometimes. If you owe very small amounts of debt, you could just be better off negotiating down a bill yourself with the company, but as I always say....there is typically a lot of red tape involved, and results are not always guaranteed. You could suffer the consequences of having a bill hit as unpaid on your credit report, while still having creditors call you, so tread lightly if you decide to go that route. It could work out well for you, but you could be stuck in worse shape than you were before.
NOW...LETS MOVE ON TO BANKRUPTCY!!!!
The Almighty chapter 7! A (almost) complete wipe out of your debt. However, let's start with the bad new of chapter 7 before we get to the things i love about it.
Pitfalls of chapter 7
1) You can only do it once every 8+ years
2) If you want to keep a car or a house, you would still be 100% on the hook for paying that mortgage and your car note in accordance to the agreement you signed with the original finance company.
3) It is your responsibility to prove to the court that you are totally insolvent.
4) It does not eliminate your obligation to pay child support, your student loans, and in most instances you will still be responsible for paying irs debt in some circumstances.
Benefits of chapter 7
1) It can help you eliminate credit card debt, pay day loans, personal debt, gas bills, light bills, other utility bills, old bills for things you no longer own, and can be a way to even help you get out of some legal fees and business fees that you owe to a business.
2) It can show as evidence that paying your bills would be an undue hardship on you.
3) It can free up your cash flow to help you start building your credit anew.
I won't go into the pitfalls and benefits of chapter 13, as I have previously spoken about that in a previous post, but generally its great for those who own property they want to keep and have equity in property ect. But it comes with its own special set of pitfalls and benefits.
The major and most important feature between bankruptcy and debt settlement is the presence of recognition by the court. As an attorney, I have learned that if there isn't a court order in place, then there is an argument as to whether something really ever happened. There is always the risk that a creditor could come and say an agreement wasn't reached, or that something didn't happen if a court order was never entered. Bankruptcy is a legal proceeding, a judge is involved, and a court order/court records will be present as proof that your debts have been cleared or settled on. However, with debt settlements, typically businesses are just working with you and there is always the risk of the creditor coming back and biting you if you don't have the proof to validate what you have done (again, why i recommend an attorney when you try to do debt settlements....attorneys are known to be great record keepers)
I hope you guys learned a bit today! And if you have any questions about this, feel free to reach out. Arm yourself with information! What you don't know could literally cost you, and kill you!