It\’s time for you to take a serious look at your financial future if your level of debt is far in excess of your income or assets. If you can no longer afford to make repayments on your existing debts, then it’s time to consider either filing for Chapter 7 or Chapter 13 bankruptcy. You do also have the option of debt settlement, which allows you to repay part of what you owe without filing bankruptcy.
Debt Settlement vs. Bankruptcy
When you file for bankruptcy, the judge will discharge all, or most, of your existing debts, providing you with a second chance at managing your personal finances in a responsible manner. A debt management plan is where you mutually agree on a monthly repayment plan which covers all your existing debt. A debt settlement is somewhat different in that you pay your creditors in a single lump sum or in installments, but you only pay a fraction of your total debt. In effect a debt settlement is simply haggling for a better deal from your creditors.
Know Your Debts
Order a copy of your credit report if you don’t already have one. Check that it\’s completely accurate, and if there are any errors contact your creditors about them immediately. There is always the possibility that you\’re repaying a debt you don\’t actually own.
The Lump sum
One of the main issues around the idea of using debt settlement is that you obviously need to have enough cash to cover the lump sum payment to your creditors. If you’re in a position where you’ve been considering declaring bankruptcy then you’re already struggling financially, meaning you’ll have difficulty gathering together enough money for the final payment to your creditors. Some people decide to stop paying other bills while putting together the debt settlement payment but not paying other creditors will damage your credit score and would not improve your situation.
Your Credit Rating
Some people believe that a debt settlement has no impact on their credit rating, but that isn’t the case. Filing for bankruptcy and negotiating a debt settlement both have an effect on your credit score for several years. A bankruptcy will stay on your credit report for up to ten years, and a debt settlement will be noted on your credit report for up to seven years.
In terms of how debt settlement affects your credit rating, you can expect it to drop by fifty points. This is based on the reality that you’re already missing payments on specific debts; each missed payment has an impact on your credit score.
Debt Settlement Companies
These companies are of no benefit to you in terms of reducing the amount of debt you owe. You’d be far wiser to deal with a financial advisor, or experienced bankruptcy attorney instead. The promises made by debt settlement companies are pure fantasy and can actually result in you being sued by your creditors. There is no way to walk away from your debts without causing damage to your credit rating.
Potential Tax Issues
What debt settlement “experts” never mention is that when you come to a debt settlement arrangement with your creditor(s) the forgiven debt is actually classed as income by the IRS. The IRS would normally tax your creditor on this income, but now that they’ve “forgiven” you of that debt it’s up to you to pay the taxes on that income instead. Basically, the money you didn’t have to repay to your creditors is viewed as gained income by the IRS.
Please consult with an experienced bankruptcy attorney before deciding to negotiate a debt settlement. There are nuances you need to be made fully aware of, and your attorney can ensure you make the right choice based on your current financial, and personal, circumstances.