If anyone tells you that either debt settlement or bankruptcy is the better route without knowing the details of your situation, you should stop listening to them. They either don’t know what they are talking about or they are lying to you. There are benefits and detriments to both
, which is the better alternative depends on your situation. Below are some things to keep in mind when deciding which path you want to pursue. This list is by no means exhaustive, but it should shed some light on the issue.
Negotiating a compromise on a debt can be pretty straight forward. You have leverage or you don’t. Common sources of leverage are the threat of bankruptcy, a valid legal defense (i.e. you don’t actually owe the money), and the time cost of money, i.e. $80 today is better than maybe getting a $100 next year. Without leverage to negotiate a settlement, don’t expect great results, particularly if you are employed and your wages are garnishable.
Avoid current delinquencies on your Credit Report
Various things kill a decent credit score. Delinquent debts, debts that are identified as settled or charged off are others, all of which do significant damage to one’s credit score. Often debts that are not current, but are being paid on, can be damaging because they show up as current debts not in good standing, when they are really old debts not in good standing but are getting better. Time is one of the great cures for a bad credit score. An old bankruptcy filing on one’s report will be better than a current delinquency on a credit report.
Employers can legally discriminate against you for having bad credit. The law forbids an employer from discriminating against you for filing bankruptcy, at least once you have a job. Though the bankruptcy law forbidding employer discrimination is somewhat unclear, Courts have generally held that the law just forbids discrimination against employees who have filed bankruptcy. Discrimination against a job applicant is probably legal.
The devil is in the details of the settlement agreement. Though conceivably a settlement can afford you much more flexibility than bankruptcy, creditors are generally upset that they have not been paid, so one shouldn’t expect great flexibility from creditors unless one’s situation is unique.
Forgiveness of debt is an accession to wealth as far as the tax code is concerned. This means that even if you settle your debts, you may end up with a significant tax liability. Tax liabilities are generally not dischargeable in bankruptcy. If you settle your debts you need to make certain that you will not be saddled with a non-dischargeable debt that you can’t afford.
Fighting the Credit Reporting Agencies
Having good credit generally matters to people. Credit Reports are routinely inaccurate. If you are able to clear up your financial situation, expect to have to sort out the status of your prior debts with the credit reporting agencies. In bankruptcy, you have a court order which makes things simple. In a settlement, you have a settlement agreement. If your credit matters to you, you need provisions in your settlement agreements that will protect you from adverse credit reporting from your creditors.
Sometimes creditors will refuse this. They may tell you that by law they have to report adverse items. This is not true. They have to report accurate information, but there is nothing that states they have to report the information.
In a Chapter 7 bankruptcy, there is no repayment plan. Occasionally, there are assets that need to be liquidated for the benefit of creditors. In a Chapter 13 bankruptcy, there is a plan. It lasts for three or five years depending on the facts of the case. Settlement works best when a single lump sum can be paid to satisfy the debt. In both a Chapter 13 and debt settlement, there are usually significant and damaging repercussions for missing a payment. It just depends on the circumstances of the case. If you have a change in circumstances in a Chapter 13, you may be able to get a modification in your plan.
If you are not sure whether to file bankruptcy or to try and settle your debts, don’t ignore the problem. If you need help, don’t engage an organization that is going to push you in one direction or the other. You don’t want to be spending money trying to settle your debts, when bankruptcy is the only realistic solution and you don’t want to be filing bankruptcy when you could settle your debts and not have to deal with the complications of filing bankruptcy. As your legal counsel, we can help you navigate through this situation, settle your debts for you or file bankruptcy for you.