Debt settlement vs bankruptcy - 7 Tips to choose the right option

• Ask an Expert

By Good Nelly

Ask Nelly

If you're drowning in debt and bankruptcy seems to be the only way out, think twice as there are alternatives which can help you pay off bills fast without affecting your credit as severely as bankruptcy. Debt settlement is one such alternative. It enables you to get out of debt legally by allowing you to pay much less than what you actually owe.

Debt settlement vs bankruptcy - Tips to help you make the right choice

Check out 7 things you should do to decide upon debt settlement vs bankruptcy.

1. Check your credit report: Find out what negative items (such as late payments, collections, charge-offs, etc) you have on your credit report and on which accounts you still owe money. This will help you determine the extent of your indebtedness.
2. Calculate your total debt: Determine how much you owe in total. Add up the outstanding balances on your credit accounts including those which are in collection.
3. Calculate income from all sources: Determine your total monthly income including paycheck, bank savings, rental income, alimony/child support, investment returns, etc.
   
   If your income doesn't exceed the amount paid towards your basic financial needs including housing expenses, utility bills, gas, groceries, etc., then you shouldn't go for settlement. This is so because you can hardly save anything to settle your bills with a lump sum payment after a certain period of time.
   
   However, if you've thought of filing bankruptcy, calculate your average monthly income for past 6 months (gross monthly income divided by 6) preceding the month you file bankruptcy. The average monthly income is compared to your state median income to find out whether you qualify for Chapter 7 or 13. Moreover, you need to find out whether you can afford the costs of filing bankruptcy.
4. Check if you qualify for settlement: You need to have a certain amount of outstanding balance so as to make a settlement company negotiate with creditors on your behalf. However, this qualifying amount may vary from one company to another.
5. Find if bankruptcy can erase all your dues: It is essential that you verify whether bankruptcy can wipe out all your bills. Not all your bills can be discharged through bankruptcy. So, depending upon your outstanding balance on each account and the type of bills you have, bankruptcy may or may not be the right option for you.
6. Know the consequences of filing bankruptcy: You should be aware of the consequences of filing bankruptcy. A bankruptcy affects your credit score by 200-250 points depending upon what other negative remarks you have on your credit report. It stays on one's credit report for 7-10 years. This is why you may have problem in getting qualified for new credit (such as credit card, mortgage to buy a home, etc) in the next few years. Moreover, if you file Chapter 7 bankruptcy, it may require you to sell your home or car provided they don't qualify for the Federal or State exemptions. Thus, it is better to avoid bankruptcy.
7. Find out if settlement can hurt your credit: If you choose to settle your bills, you're likely to trash your credit score. That's because you may have faced late payments or collections on your accounts prior to asking for a settlement. Stop payments drop down your credit score by 50 points or more depending upon how many payments you've missed and what negative listings you have on your credit report. But there are easy ways to repair your credit after settlement.
   
   In certain cases, you can save your credit from being trashed even after settlement. This is possible when creditors or collection agency agree to report your account status to the credit bureaus as "Paid in full" or when they sign on a pay for delete agreement. Under this agreement, once you settle an account, your creditor or collection agency removes the account listing and any negative remark from your credit report. This saves your credit from getting a hit.

What to do when you can't settle bills or file bankruptcy

It may happen that you do not qualify for bankruptcy filing or you may not find settlement as a viable option to get rid of bills. In such a situation, you may choose to consolidate bills by getting enrolled in a consolidation program or applying for an unsecured personal loan.

When you choose to deal with a third party to settle or consolidate your bills or you hire a bankruptcy lawyer, you'll have to pay certain fees in return of their services. However, if you're confident that you can negotiate with creditors on your own, it'll not only reduce your monthly obligations but will also save you dollars which you may otherwise pay as third-party fee.

Rach775

Posts: 0
Credits: 612.15
Send message to Rach775

Sub: Debt settlement vs bankruptcy - 7 Tips to choose the right option

Wed, 01/30/2013 - 22:02

• reply

For some reason I cannot log on!! Here is my new question and I will post my old underneath thanks!

I spoke with an attorney about bankruptcy and the news is not good. My husband and I make over the medium income so we would have to file a chapter 13; however, based upon government figures: we should be able to pay $1000 a month towards the bk! I'd like to know how they figured that out!! So basically we lose everything, have to shut off our cable, sell/eliminate one vehicle plus pay $60,000 over the next five years. So we will end up paying our creditors in full!! If this is possible, why am I filing bk? Can anyone explain this to me?

Would debt consolidation work for us? We don't want to lose everything, pay our creditors in full but still have the bad credit hit for the next 10 years. This just doesn't make sense to me. I don't mind a sacrifice and I don't mind paying what I owe but I swear our current budget comes back negative 400 per month. Our gross incoming is $8000 over the median which is 75,000.

I know you can't tell me what to do but if this was you what would you do? Go with the bk? Honestly I'm more curious about knowing the bk alternatives. My stomach is so sick that I can't sleep. Thanks!

First Posted January 30th

I realize it is harder to file bk now than ever before, however, it's something we have tried hard to avoid, but I'm wondering if it may be a better option for us.

We have roughly 52,000 in unsecured debt. Last April we signed a contract with a debt settlement Company to handle our accounts. We have already paid them about $5,000 of the $8,000 we will be paying them. We stopped paying all of our debt last April/May and instead have been putting our monthly payment an Escrow Account, which currently holds about $1200 (the rest has gone to their fees). There were three of our accounts that we were able to send Power of Attorney Letters to and they have pretty much left us alone (until recently). However, three of our debts we had to handle differently than the rest of the accounts. I have logs and logs of calls that we have received over the past 7 months.

On January 15, 2007 I received a fed-ex package from one of our credit accounts for an Arbitration Hearing. I called our settlement company to inquire about this and they sent me paperwork and guidelines to follow, however, they basically told me I'm on my own. This account was suppose to be an "easy" settlement account; however, now it has turned into Arbitration which could end up with a judgement that would not be included in the program.
I guess, basically, I fear going through this settlement program and ending up with judgement that they "don't handle". I am tired of the endless harassment and tired of always struggling and being behind in our bills.
We have a house with no/little equity to speak of and two cars that we have a balance on which is pretty equal to the amount of the blue book value. My husband and I have decent incomes; however, our debts exceed what we bring home every month so we are always behind on something. We are going to catch up this February with our tax refund but will probably again fall behind towards the end of the year.

What do you think our best avenue is? To stick out the settlement or to file bk? We've consulted a bk attorney - she advised that we file bk. She can guarantee results. Although we make "too much" to file Chapter 7 we would have to file Chapter 13 and I have no idea what the monthly payment would be.

Thank you for your time.