When you are living in debt it is difficult to know where to turn for help. There are options such as bankruptcy or debt settlement. Most people know that bankruptcy hurts your credit score which greatly affects people’s opinion of it and often causes them to fear the idea of filing for bankruptcy. There is also the option of debt settlement. No matter what option you chose to help rid debt from your life, your credit score will be affected, with debt settlement it is not affected as strongly as filing bankruptcy.
A chapter 7 bankruptcy, also known as a liquidation bankruptcy, is used to liquidate your assets in order to pay back your debts. In order to file for bankruptcy you must first be subject to a means test and also get professional confirmation from a credit counseling program. I you are filing for a Chapter 7 bankruptcy, it will only get rid of your unsecured debts though.
Unsecured debts are those such as credit card debt medical bills and personal loans. What these types of bankruptcies don’t do is pay off student loans, alimony or child support. The best part of filing for bankruptcy is getting rid of almost if not all of your unsecured debt. This usually is done in as little as 4 to 5 months whereas debt settlement is not paid off until 24 to 48 months after creditors settle.
Also, creditors are not allowed to contact you after filing for bankruptcy. Unfortunately, personal items that you own may be collected and liquidated in order to pay off your debt. However it is fairly unlikely that essential things such as your home or car will be taken. The many pros and cons of each make it difficult to choose, bankruptcy or debt settlement.
Unlike chapter 7 bankruptcy, debt settlement does not get rid of your debts. What it does is it is gives you a way to pay off your debt in a given span of time. You don’t actually pay the money to the creditors that you owe though. You would need to hire a debt settlement company, who then speaks with the creditors that you owe and settles your debts.
You would begin making scheduled payments to the debt settlement company that you hired which would then be placed in a trust account and used to pay off your debt once your creditors settle. Of course there are pros and cons to both, bankruptcy and debt settlement. One con of debt settlement is that it takes longer than bankruptcy to get out of debt and it will cost you money.
Debt settlement is kept more private and your creditors do in fact, get paid. Another fact that should be known about debt settlement is that debt cancellation or forgiveness is taxable. If a credit card company was owed $5,000 and the company settled for $2,000 then you and the IRS would be sent a 1009 form showing the $3,000 of forgiven debt as taxable income. Debt cancellation through filing bankruptcy is not taxable.
Your Credit Report:
When trying to choose between bankruptcy or debt settlement, it is important to understand how both processes work and how your credit score and report will be affected by each. It is also advised to seek financial advice from an accredited credit counseling agency. Not only is this required if you are going to file for bankruptcy, but it gives you a chance to get more information that pertains directly to your financial situation.
Since both bankruptcy and debt settlement will affect your credit report, it is unlikely that you would be able to make any large purchases such as a house or car for a number of years. Many people believe that filing bankruptcy portrays poor character which makes it very difficult for those who have filed, especially since it is made public. Debt settlement affects your credit report poorly because creditors are required to report when payments are not made. From the time that you stop making payments and the time that your creditors will be reported to the proper agencies.
After you have completed the payments using debt settlement help your credit report will be marked as “Account paid in full but for less than balance owed”. This will be visible on your credit report for seven years. In the case of filing bankruptcy it is shown as them being charged off as bad debt, which is worse than what is shown after debt settlement.
In choosing between bankruptcy or debt settlement you must be careful to make sure you have all of the information on each and thoroughly understand all of your options. Each has many pros and cons so it is a good idea to speak to a financial consultant to make the proper decision. Depending on your financial situation, filing for bankruptcy may be better.