As an Asheville bankruptcy lawyer, one of my main tasks is to figure out a client’s best financial alternatives. I try to explain those options in a way that is easy to understand and simple to execute. Frequently, potential clients ask, “What is better for me? Debt settlement or bankruptcy?”
Here are some of the considerations I think are important in trying to make a decision.
Do you have money available to offer a settlement?
Settlement offers vary considerably from creditor to creditor but most creditor offers require a lump sum to be paid within a few months of reaching an agreement. Many times, this eliminates settlement as a good option since filing a bankruptcy can achieve a similar result with less money out of pocket. Frequently, a bankruptcy case is a less expensive alternative. Instead of spending available money on a settlement, I often encourage folks to invest the same money in home repairs, medical care, college savings plans for minor children, or retirement accounts in conjunction with a bankruptcy case that requires less money out of pocket.
How many creditors do you have?
Managing to settle debts becomes more difficult when many creditors exist because an agreement needs to be reached with each creditor individually. If only a few creditors are out there, settling those few debts for a complete solution becomes easier. Settling with one or two creditors before making a plan for all your other creditors is a mistake, in my opinion, because it does not solve the entire problem. Bankruptcy is nice because all of your creditors can be effected by the Court’s Discharge Order in one proceeding.
What is the impact of debt settlement on your credit report?
Settling a debt will be marked on your credit report as a negative and stay there for 7 years under normal circumstances. A bankruptcy case typically ends negative reporting because all the debts are covered by the discharge order but is also a negative on your credit report. Credit scores can improve after bankruptcy, however, without being bogged down by continued negative reporting on a loose debt from somewhere back in your pay history.
What are the tax consequences of debt settlement?
In debt settlement, the creditor typically issues a 1099 for the forgiven portion of the debt which the IRS can attribute to you as income. In bankruptcy, there are no such negative tax consequences to consider because your debts are discharged by the Court, not forgiven by your creditors.
Before you decide to settle your debts, it is wise to consider all of your options. Most typically the decision boils down to which option delivers the most relief for the least amount of money. If you are wondering what your options look like, and live in Western North Carolina, I would be pleased to speak with you during a free, initial bankruptcy consultation.
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