Many people who are overwhelmed with credit card debt and have debt collectors calling their homes are under an immense amount of pressure. When people look for help to get them out of debt, they are often looking at debt settlement or bankruptcy to help them. Bankruptcy is a legal process, that allows you to discharge your debts. Debt settlement is a process where you offer money to your creditors to settle for less than what you owe.
Debt Settlement
Many people who end up in a debt settlement program probably shouldn’t be in one. If you have no money after all of your expenses to offer your creditors then debt settlment is not a good option for you. A debt settlement profram will have you deposit monthly payments in a trust account with the company. As you continue to make payments into this account the company will take their fees out and settle your credit card debts. Debt settlement companies can charge high fees for their services. Often, many companies fail to explain to people that if you don’t settle the debts quickly the credit card companies will begin suing you. Moreover, you will be liable for the forgiven amount.
The IRS counts the forgiven amount as taxable income when you file your taxes. Further, debt settlement isn’t guaranteed to work. Some creditors refuse to settle debts with debt settlement companies. And if you stopped making payments on your debt in anticipation of negotiating it down, you could find yourself owing that creditor more than you started with and your credit will go down drastically. Many companies won’t tell you that the debt settlement companies won’t work with you until you are atleast 90 days behind. As the accounts continue to be delinquent the more your credit score will decrease.
Bankruptcy
Bankruptcy is a legal tool which helps people get out of debt. The most common types of bankruptcies for individuals are Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy, your debt is completely eliminated. In a Chapter 13 bankruptcy, your debt is put into a plan and in some cases you may not have to pay back all of your debt.
With Chapter 7 bankruptcy, you get a discharge . A bankruptcy discharge means that your debt is completly erased. This allows you to start over fresh.
You Can learn How to file Chapter 7 bankruptcy here.
Chapter 13 bankruptcy wipes out part of your debt. You have to pay off the rest through a repayment plan, typically over three or five years. Unlike Chapter 7, you can keep your assets.
Which Costs More: Debt Settlement or Bankruptcy?
Determining whether bankruptcy or debt settlement costs more will depend on your situation. If you owe less than $5,000, debt settlement can sometimes be the cheapest option — especially if you don’t qualify for Chapter 7. This is because you may be able to settle your debt for much less. Keep in mind that debt settlement companies charge high fees so you may want to try to caluclaute it out. The least expensive option will vary from case to case. Grab your calculator and estimate how much you’ll pay for each option before deciding.
- Debt settlement. Expect to pay 65% to 90% of the total cost of your debt after factoring in fees, taxes and interest, with most people saving on the lower end of the spectrum.
- Chapter 7 bankruptcy. Expect to pay anywhere from $500 to $3,500 in legal fees, plus a $335 filing fee, which can be waived if your income is 150% below the poverty line
- Chapter 13 bankruptcy. Expect to pay anywhere from $1,500 to $6,000 in legal fees, plus a $310 filing fee.