When you are in debt, you are always looking for ways to either reduce or bring it down. It can feel like a crushing weight unless you find a way out of it. The two most common last resort debt relief options people have in such a situation are debt settlement or bankruptcy. Each has its pros and cons, and it is wise to become familiar with the two to make a safe and smart decision. Let’s take a look at what you should consider between the two to ease your financial burden.
Differences Between Debt Settlement And Bankruptcy
What Is Debt Settlement?
To help yourself with your financial burden, you first need to understand the concept of debt settlement and bankruptcy.
Debt settlement, a type of debt relief, is simply the process of negotiating with your creditors to reduce the debt or payments. Debt settlement can either take place by you directly contacting the creditor or involving a third-party company. There are a lot of third-party companies that negotiate on your behalf, but there is no guarantee the creditor will agree to it.
The reason is that creditors are not required by law to agree to the conditions. So, they can decline upright without any reason. This usually happens when your expenses and overall budget management is poor and the creditors are in no mood to forgive.
But if they see you actually struggling and trying to improve your situation, they might give you some relief. One way to negotiate with your creditors is to convey that you are on the brink of bankruptcy. Instead of sending no payments their way, you can send some payments regularly if they were to reduce the debt.
But filing for bankruptcy will hurt your credit score in the long run. If the creditor agrees to you or the third party representing you, they will either settle for a reduced lump sum amount or structural payments.
What Are The Pros Of Debt Settlement?
The biggest advantage of opting for debt settlement is that you get to reduce the total amount you owe. Then again, this does not necessarily mean the creditor will agree to your request. If your track record or financial management is balanced, the creditor might help you get away with some amount.
But if you are on a spending spree and hardly care about your expenses, the creditor will show no signs of mercy. Plus, debt settlement helps you avoid bankruptcy, which damages your credit score. So, if the creditor agrees to your conditions, reducing the amount may help you avoid bankruptcy. If you can pay a lump sum amount to the creditors and want to avoid bankruptcy, then contacting debt settlement companies Bronx can be helpful.
What Are The Cons Of Debt Settlement?
Perhaps the biggest disadvantage of debt settlement is that, since you stop making payments during negotiations, it could hurt your credit. The reason is that your creditor will still want the money you stopped paying. Once the negotiation has been reached, don’t think the creditor will forget the payments.
They will ask you to pay them as well, which will accumulate into a bigger amount over time. Plus, in some cases, the IRS may consider forgiven debt as taxable income. Debt settlement is a good option if you have unsecured debt like medical bills or credit cards and can afford to make a lump sum or structural payments.
But, if the debt happens to be too big, it is highly unlikely the creditors are willing to negotiate and will rather ask you to take the bankruptcy route.
What Is Bankruptcy?
Bankruptcy is something every individual with financial burdens dreads. No matter how bad the financial situation is, nobody wants to file for bankruptcy. The reason is that it takes almost everything away from you. But sometimes, if you are in an extremely difficult situation, such as losing a high paying job, bankruptcy can help you regain control of your situation.
There are two main types of bankruptcy for individuals: Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy eliminates most of your unsecured debts, like personal loans, medical bills, credit cards, etc. But you might have to sell all your assets and the process is usually quick, between 3 to 6 months. You will also have to pass a means test to prove you are not able to pay off your debts.
Chapter 13 Bankruptcy
On the other hand, Chapter 13 bankruptcy allows you to keep your assets while you continue making payments under a court-approved plan. But the catch is that the payments last 3 to 5 or more based on your income. This is usually a safe option for those with steady but overwhelming debts.
When Bankruptcy Makes Senses And When It Doesn’t
Bankruptcy makes sense if you cannot afford to make meaningful payments towards your debt. It could also make sense if you are facing lawsuits, foreclosure, or wage garnishments. But bankruptcy won’t benefit you much if you have mostly secured debts like mortgages or car loans.
Regardless of the type of bankruptcy, one thing remains the same, and that is stable income. You need to have a sufficient and stable enough income to make your payments. If not, bankruptcy will be the best option, but it can only be filed through the court.
Key Factors To Consider Before Making A Decision
Before making a decision between bank settlement or bankruptcy, you need to consider some important factors. The first and most important factor is the type of debt. While debt settlement is suited for negotiable debts, bankruptcy is only effective for overwhelming unsecured debts.
Bankruptcy has a lot more and damaging effects on your credit, while debt settlement has relatively less impact. Moreover, settlement will work only if you can repay some debts, but if you are unable to do anything, bankruptcy will be the only option.
Furthermore, bankruptcy can stop lawsuits and similar cases, but debt settlement does not. There is no universal answer as to what is better because it depends on the financial situation of the individual. If you are confused and are not able to make a decision, you should consult an expert or a company that offers negotiation services.
Find The Right Person Or Third-Party Company
If you are compelled to involve a third party, you should be careful and do your research. There are a lot of scams nowadays and you wouldn’t want more headaches on top of the debt. It would be best to find a referral and explain your situation to them. Make sure there are no hidden charges and they do not ask for an upfront fee.
This is one of the most common ways companies scam people nowadays. A third party will either charge fees during the negotiation process or at the end of the service. And, if you think it is possible to contact the creditor directly and persuade them to lower your debt, it would be the best option.
Conclusion
The decision between debt settlement and bankruptcy lies with your financial standing. There is no best option in this case, but simply the one that suits you. The ultimate goal should be to either reduce the debt or file for bankruptcy, which will offer you a fresh start, but you will need to tread carefully to avoid additional financial obligations down the road. Consult debt reduction services Brooklyn for help.