As an Asheville bankruptcy attorney, I speak with potential clients about their alternatives to bankruptcy during their free, initial consultation. Many clients are concerned about preserving their credit moving forward, and wonder if proposing a 30%-50% settlement to their creditors is better than filing for Chapter 7 or Chapter 13.
Advantages of Debt Settlement
Avoiding a bankruptcy case is a good idea if practical or possible. A bankruptcy case will prohibit you from using an FDIC insured bank to purchase a home for at least two years. Further, if you file a Chapter 7 case and receive a discharge, you will be prohibited from receiving another Chapter 7 discharge for 8 years. Lastly, you can avoid having to admit to friends and family that you needed to file for bankruptcy. This last point seems small, but is often the crucial factor for why people choose settlement.
– Avoid the prohibition on obtaining a mortgage for two years
– Avoid the stigma some people attach to bankruptcy
– Keep your options open for receiving another bankruptcy discharge
Disadvantages of Debt Settlement
I’m biased. I file bankruptcy cases for a living, and believe it is one of the few, powerful financial tools available to consumers in need of a financial fresh start. With that said, I do not think settlement is a good or viable option for most people. The biggest problem with settlement, in my view, is that it is much too expensive. If you have $20,000 in credit card debt, and are able to achieve a settlement of 30%, you will need to pay $6,000. Most bankruptcy cases cost only a fraction of that amount. I would rather folks file a bankruptcy case and start an emergency savings account with the same money they would have paid to their creditors in settlement. The main reason people pay these large sums, in my view, is that they think they are preserving their credit score. Wrong! A debt settlement will be reported as a negative defect to the credit bureaus. Additionally, the Internal Revenue Service will likely treat the forgiven portion of your debt as income, meaning you may need to pay more in taxes. In bankruptcy, your debts are discharged so you will not have this additional tax burden. Lastly, settlement only works for the companies you can reach an agreement with. The creditors are not required to agree to terms. This means a total solution to your financial problems will require reaching an agreement with every creditor you have. In bankruptcy, all of your creditors are subject to the power of the bankruptcy court whether they like it or not.
– More Expensive than filing for bankruptcy
– Like bankruptcy, a major hit to your credit rating
– Increased tax liability on forgiven portion of debt
– Less powerful than a bankruptcy discharge
– More time consuming and less predictable
Become Informed Before Making the Right Choice
A free consultation with an experienced bankruptcy attorney can highlight the advantages and disadvantages of your options. It might also help make you aware of different alternatives you had not considered. For those of you in Western North Carolina, I would be pleased to speak with you during a free, initial bankruptcy consultation.
*The information contained on this website is not intended and does not constitute the providing of any legal advice or any legal opinions or services to any user thereof. The information available on or through this web page is not intended and shall not be used as a substitute for the advice and consultation provided by an attorney. Any factual examples used to illustrate concepts are hypothetical and do not depict actual events or real persons.