When you have bills that you cannot pay, you may explore several options for debt relief. Two options for eliminating debt that you might consider are filing for bankruptcy relief and debt settlement. Both options can get rid of your unsecured debts, and each option has pros and cons. However, filing for bankruptcy relief has some options that might outweigh debt settlement for some individuals.
Keep reading to learn more about:
- What Are My Bankruptcy Options?
- What Is Debt Settlement?
- Pros and Cons of Bankruptcy vs. Debt Settlement
- How Do I Know Which Debt Relief Option is Right for Me?
What Are My Bankruptcy Options?
Most individuals file for bankruptcy relief under Chapter 7 or Chapter 13. Both chapters of bankruptcy eliminate most unsecured debts. Unsecured debts include:
- Medical bills
- Credit card debts
- Most judgment liens
- Personal loans
- Old rent payments and lease payments
- Deficiency judgments from foreclosures or repossessions
Most tax debts are not eligible for a discharge. However, old income tax debts might be dischargeable. Likewise, most student loans are not dischargeable, but some Chapter 7 debtors can discharge student loans if they meet specific requirements.
Chapter 13 Bankruptcy Cases
Chapter 13 is a repayment plan. You can catch up on past due mortgage and car loan payments to keep your home and car. You can also spread out tax debts and past-due domestic support payments (alimony and child support) to avoid liens and wage garnishments.
Chapter 13 plans typically require three to five years of payments. Your bankruptcy payments are based on numerous factors, but most people only pay a small percentage of their unsecured debt through their Chapter 13 plan.
Chapter 7 Bankruptcy Cases
Chapter 7 bankruptcy cases are designed for individuals who cannot afford to repay any portion of their unsecured debts. They must meet income requirements to file under Chapter 7. However, if they qualify for Chapter 7, they are not required to pay any of the unsecured debts eligible for a bankruptcy discharge.
Chapter 7 is not a repayment plan. You cannot catch up past due domestic support payments, taxes, mortgage payments, or car loan payments in Chapter 7. You would need to work with these creditors to repay the debts. You could surrender your home and car to get rid of those debts, which can be useful if you are upside down on these payments.
A typical no-asset Chapter 7 case can be completed in four to six months after filing your bankruptcy petition.
What Is Debt Settlement?
Debt settlement does not involve a payment plan. It involves negotiating with your creditors to resolve your debts for less than you owe on each account. Most creditors require you to pay one lump sum to resolve the debt. You must also have access to sufficient funds to pay the lump sum immediately to negotiate a smaller payoff.
You can negotiate directly with your creditors. There are also debt settlement companies that offer to handle the negotiations for you.
Pros and Cons of Bankruptcy vs. Debt Settlement
When you compare the two different debt-relief options, you can see that each option has advantages and disadvantages.
Pros and cons of filing bankruptcy include:
- It can be a quick way to get rid of debts through Chapter 7 without paying any money toward most unsecured debts
- You can prevent foreclosures and repossessions through Chapter 13
- Filing bankruptcy can stop wage garnishments and debt collection lawsuits
- Your creditors must work through the bankruptcy system
- A few people lose property in Chapter 7
- Filing Chapter 13 is a three to five-year commitment
- Stops creditor harassment and debt collection efforts
- You are not required to pay income taxes on the portion of the debts forgiven through bankruptcy
- Pay what you can afford to get rid of unsecured debts through Chapter 13
- Protect the equity in your home and other assets with bankruptcy exemptions
- Can protect non-exempt property from creditors by filing under Chapter 13
- Protect the money in your retirement accounts from creditors
For many people, filing bankruptcy is one of the best debt relief options. However, some people choose to debt settlement because they do not want to file for bankruptcy relief. They believe that settling their debts directly with creditors instead of filing bankruptcy might be better for them in the long-term.
However, there are several disadvantages of debt settlement that could make filing bankruptcy a better option.
Disadvantages of debt settlement include:
- You must pay income taxes on the portion of the debt that is forgiven
- Some creditors may refuse to work with you and continue debt collection efforts, including filing debt collection lawsuits
- Debt settlement companies often charge high fees for their services with no guarantees of success
- Many creditors want 50 percent or more of the debt to settle the account, which could be much more than you would pay in a bankruptcy proceeding
- You may be unable to settle all your debts, which could result in a bankruptcy filing in the future
- Many people use the equity in their homes or their retirement funds to settle debts. A bankruptcy filing could protect the equity in your home and your retirement funds from being used to repay debts.
- If you borrow money to repay the debts, you may be creating a new debt that you cannot afford to pay that is secured by your home or other assets.
Debt settlement may work for a few people. However, it is best to consider all debt relief options before choosing the option that is right for you.
How Do I Know Which Debt Relief Option is Right for Me?
Deciding between filing bankruptcy and using debt settlement to resolve your debt problem may seem overwhelming. However, there is a way you can make the process less stressful and more productive. Meeting with a Madison bankruptcy lawyer to discuss your debt problems can be the first step in getting out of debt.
A bankruptcy lawyer analyzes your financial situation, including your income, expenses, debts, and assets. The attorney explains how various debt-relief options, including bankruptcy, could benefit you. He also discusses the potential consequences of choosing a specific option.
After learning more about filing bankruptcy versus other debt-relief options, you can make a decision that is best for your financial situation.
Contact Our Madison Bankruptcy Attorney for a Free Consultation <
We understand that dealing with debts you cannot pay is stressful. Our goal is to help you find an affordable solution to your debt problems.