People who are struggling financially often look for different ways to help them get out of debt. Debt settlement and bankruptcy are two of the common tools consumers use to help them get out of debt. Many people wonder which tool is better to help them get debt relief. Financial hardship can cause immense amount of stress. This article will explore which option is best.
What is Bankruptcy
Bankruptcy is a legal way to help people get out of debt. A bankruptcy allows you to eliminat eyour debts. When most people file bankruptcy, they usually want to file Chapter 7 bankruptcy. A Chapter 7 bankruptcy can get rid of medical debt, unsecured loans, credit card debt and even some tax debt. A bankruptcy can stop debt collectors from coming after you. If you are unsure whether you qualify for bankruptcy, it is best to speak with a Staten Island Bankruptcy Lawyer or New Jersey bankruptcy lawyer who can point you in the right direction.
What is Debt Settlement?
Debt settlement is where a company negotiates a debt for a lesser amount than you owe. A debt settlement company will work with your creditors to come up with an agreeable amount. These payments are referred to as settlements. Creditors will allow you to either make lump sum payments or spread the payments out overtime. More often, consumers don’t have enough money to make a single lump sum payment so they will be forced to make payments overtime. When you sign up with a debt settlement company, you will put money into an escrow account to pay your creditors. The objective is that as the escrow continues to build, the debt settlement company will use this to offer settlements. Debt settlement companies will tell consumers that to negotiate settlements with creditors, they will be required to stop making any payments on their cards. Keeps in mind, that as the debt continues to fall into a delinquent status, it will be reported to the credit bureaus. This will cause a major impact on a credit score.
Debt Settlment Vs. Bankruptcy
Debt settlement companies are usually sales people. They usually get people to sign up by using agressive advertising techniques. Many companies will spew lies that say “avoid filing bankruptcy” or “Bankruptcy will ruin your credit forever.” If any debt settlement company does say this, run the other way! This is far from true. Chapter 7 bankruptcy is actually more favorable than debt settlement because it takes a lot less time, a lot less money, and allows you to start rebuilding your debt immediately.
If you are trying to determine if bankruptcy or debt settlment is more damaging to a credit score, you need to educate yourself on how credit scores are calculated. A credit score is also reffered to as a FICO score. To have a good score the credit bureaus look at payment history, credit utilization, length of credit history, new credit and differnt types of credit you have. Lenders will use this score to determine if you are a good canidate to lend credit to. The higher your credit score, the better chance you have of a creditor extending credit to you.
A credit score is used to determine how much of a risk you are to the lender that may be extending credit to you. Lenders will use the credit score to determine if you should be given a personal loan, mortgage, credit line etc.
How Does Debt Settlement Impact a Credit Score
While many individuals try fixing their credit with debt settlement, they often overlook the negative impacts it has on a credit score. The debt settlement companies ofter hide negative impacts. One thing many debt settlement companies hide is how long it takes for the debt settlement companies to actually resolve the debt. On average, most debt settlement plans can last anywhere from 36-48 months. As time passes, interest, fees, and penalties all continue to accrue. They also are all reported to the credit bureaus. This can cause huge impacts to ones credit score. A Chapter 7 bankruptcy, actually takes such a short time and in some cases people who have file bankruptcy have actually seen their credit score increase.
Debt settlement companies also fail to tell consumers that not paying their credit cards can cause creditors to sue them and file judgments against them. Once a creditor has a judgment against an individual they can enforce wage garnishments, freeze bank accounts, or levy their personal and real property. This will also cause a major negative impact on a credit score.
Keep in mind, that late payments stay on a credit report for 7 years. Meanwhile, bankruptcy stays on a credit report for 7-10 years. Also, settling the debt for a lesser amount then you ow is also seen as negative because the individdual did not pay the full amount. Keep in mind, that lenders will typically not extend any credit to you during the years you are involved in a debt settlement program. Lenders will worry that you won’t pay them. Moreover, your credit score will continue to show negative marks leading lenders to believe that you should not be extended credit. Bankruptcy, on the other hand, only takes about four months. Most creditors will start sending credit card offers in the mail as soon as the bankruptcy is over.
How Does Bankruptcy Impact a Credit Score?
When an individual files a Chapter 7 bankruptcy, some people will notice a raise in their credit scores while others will notice a slight drop in their credit scores. When the bankruptcy case is over, an individual can start rebuilding their credit score immediately. Lenders are more likely to extend credit to someon who recently filed bankruptcy because they have no debt. Most clients are ables to get a Capital One card immediately after their bankruptcy discharge. Many of our clients have also gotten car loans immediately after. While, individuals applying for an FHA loan were approved after waiting two years from the date of their bankruptcy discharge. Remember, a debt settlement program usually on average takes 3-4 years. This is a long time to have your credit impacted.
How Long Does Bankruptcy Stay on a Credit Report
Bankruptcy will remain on a credit report for 7-10 years, but as time passes the better a credit score will be. On average a persons credit score can increase 80-140 points a year after filing a Chapter 7 bankruptcy. Having no credit cards, and making timely payments can play a major role in improving credit. Chapter 7 bankruptcy is the quickest way to eliminate debt and start over without being penalized. Keep in mind, that bankruptcy laws were created to give people a fresh start. If filing bankruptcy would impact an individuals credit score forever, this would defeat the whole purpose of bankruptcy.
Chapter 13 bankruptcy, can also help people who are looking to get out of debt. In a Chapter 13 bankruptcy, an individual is on a repayment plan for 3-5 years. Sometimes individuals in a Chapter 13 bankruptcy, don’t have to pay all of their debts back. A good bankruptcy lawyer will look at an individuals income and expenses to determine what will need to be paid back in a repayment plan. The advantage of filing a Chapter 13 bankruptcy is that usually interest and penalties will stop accruing during this time. Moreover, your creditors will be paid in one monthly payment plan over time allowing the individual time to keep up with the payments. During the Chapter 13 bankruptcy process, creditors are not able to sue a debtor or go after them, as they would in a debt settlement plan. This means that debtors won’t be able to collect against them, enforce judgment, enforce wage garnishments, or freeze bank accounts.
There are many other advantages of filing bankruptcy that a good bankruptcy lawyers can go over with you. Karra L. Kingston Esq. has helped many individuals in Staten Island, New York and New Jersey get out of debt and start over. If you are thinking about filing bankruptcy or looking to settle your debt, give us a call today.