Debt Settlement vs. Bankruptcy: Debunking The Myth

debt settlement vs bankruptcy

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Debt Settlement vs. Bankruptcy, this is a long-standing confusion, an age-old debate, a crossroads where one has to resort to either one way when there’s no other way out. So, what we exactly intend to do by adding spark or breathing new life to the debate?

Well, we are here to let the cat out of the bag and give you an untainted idea of what the two options hold for you when it comes to your financial future. Many Debt Settlement companies wear a masquerade of being friendly but here’s the alarm raiser for you, “Debt Settlement companies are anything but friendly, the overall process is quite unsettling at times”.

Moreover, Bankruptcy is not an easy stroll along the shoreline. As a matter of fact,  a good majority of people don’t understand the implications of filing bankruptcy, be it Chapter 7 or Chapter 13.

So, the question is what will you gain after reading this blog post? The answer is that you have tried your best to keep up with the monthly payments but you keep sinking in the debt. The creditors are calling you time and again; hampering your personal and professional life and are even threatening to sue you in the court of law.

Sorry, but it’s clear that you have been strapped with only two choices, none of which is a pleasant one. This post can help you contemplate between the two options so that you can relate to the one which best fits your need.

Without further adieu, let’s unearth the truth about this evergreen debate of Debt Settlement vs. Bankruptcy:-

1. Bankruptcy

  • Chapter 7

You have two options when it comes to filing for bankruptcy, and both are in contrast to each other. In Chapter 7 bankruptcy, you get a clean slate, irrespective of the debt you owe. Chapter 7 wipes out medical bills, credit card bills and unsecured loans. Student loans obligations generally can be shed off in either type of bankruptcy unless you are able to establish the fact that you have been afflicted with a prolonged financial instability.

To file Chapter 7, you have to steer clear of ‘Means Test’.  The parameters are set upon Census Bureau data.  They are based on the facts like – the state where you reside and the number of people you are looking after in your family. You ought to be below the income limit for your family size as decided by the authorities to qualify for Chapter 7.

The biggest catch with Chapter 7 is that you realize some assets to pay off your debt. These assets are handed over to the trustee who is in charge of your case. He is responsible for realizing your assets and using the money fetched to settle scores with your creditors. Depending on where you live, you can get exemptions to safeguard some of your assets, for instance, savings account or car etc.

  • Chapter 13

Chapter 13 is likewise an approach to clear your exceptional debts however the procedure is somewhat more complex. In general, a Chapter 7 bankruptcy can be finished within six to nine months, yet it can take up to five years to get a release in a Chapter 13 case. As opposed to Chapter 7, there are bars to how much debt you can incorporate into a Chapter 13 filing.

When you document, you need to consent to pay back a few or the majority of your debts. The sum you need to pay back relies upon the sorts of debt incorporated into the bankruptcy and the amount you owe. A Chapter 13 payment plan can last three or five years, in light of your wage. If in case, you default on your payment plan, the case can be rejected which leaves you exposed to collection activities and you won’t get back any of the cash you paid in.

The merit of a Chapter 13 case contrasted with Chapter 7 is that you get the opportunity to keep the majority of your possessions. In case you’re behind on your home loan payments, you can likewise file Chapter 13 to catch up if a dispossession is pending. Contingent upon the situation, you could likewise utilize a Chapter 13 filing to dispose of a second home loan.

2. Debt Settlement

Debt Settlement is no longer the same progressive and enticing industry that it used to be some 10 years ago; where people paid lump-sum amounts to companies that couldn’t give them any relief.

Albeit, there is still a silver lining in this matrix. Increased regulations have acted as a watchdog of the Debt management companies and the arbitrators (debt settlement companies) convince creditors to pardon at least a decent share of the borrower’s overall debt.

Having said this, debt settlement is nowhere close to being a consumer-friendly industry as it is believed to be. There are some paradoxes which run across the length and the breadth of the industry and they are:-

  • Negotiations take longer than what people think

If you happen to work with a debt settlement company, you will be trialed and tested for your patience and perseverance. The road is a bumpy one with too many potholes in it. The process is often not simple; hidden costs, concealment of material facts such as effects on one’s credit score post the settlement and taxes on the pardoned and cleared debt. The most irritating it that it takes years in the process and customers risk being sued even after they have opted for a settlement service.

  • Mathematical riddles

The math often doesn’t work. Debts are normally settled for 45% to 50% of the current balance, which is often higher than the initial balance because of late fees and interest. The typical debt settlement fee is 20% of the debt at the time of enrollment. The amount of forgiven debt is usually reported to the IRS and is usually taxable as income. If the borrower is in the 25% federal tax bracket, the total cost of the settlement can equal 90% or more of the original amount owed.

Debts are usually settled for about 50% of the current balance, which is often higher than the original money owed (adding fees and the interest). The regular debt settlement fee is 20% of the debt at the time you opt in for a service. The amount of pardoned debt is sent to the IRS and is usually taxable as income. If the borrower falls in the 25% income tax slab, the total cost of settlement can be equal to 90% of the debt owed (which defies the very purpose of the settlement.)

Where Does Debt Settlement Really Help?

Neither debt settlement nor bankruptcy is a decent alternative for individuals who can pay their bills. The individuals who need to bring down their financing costs can renegotiate with a personal loan in the event that they have a fair credit score or agree to accept a credit counselor’s debt administration plan.

So when may debt settlement bode well? At the point when your debt is unmanageable and you can’t or won’t petition for Chapter 7 bankruptcy. In the event that your solitary bankruptcy alternative is a Chapter 13 payment plan, which regularly requires five long stretches of payments before any outstanding adjusts are eradicated, the settlement could resolve your debts somewhat speedier so you can start to assemble credit once more.

A Debt Settlement Plan With a Difference

If you have settled on the choice of going for a settlement plan, look no further than National Debt Relief Plan.

National Debt Relief’s plan has a manageable effect on one’s credit score plus it doesn’t cause any sustained collateral damage to one’s finances, unlike other settlers. Moreover, people with low credit scores can also qualify and National Debt Relief immunes you from harassing phone calls, intimidations and other tactics that creditors use throughout the process.

Unlike other credit card companies, that battle cry for your every buck, the debt reductions that you secure can be put into building up a store of savings or adding to your existing retirement account.

Look Before You Leap!

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