Bankruptcy Or Debt Settlement?

Bankruptcy Or Debt Settlement?

by Attorney Lyle Solomon
Note: this information only applies to those in the United States.

Deep in Debt? Do you consider bankruptcy or a potential debt settlement? There is plenty of discussion as to whether it is better to settle an unpaid debt with a creditor or file for bankruptcy. There are merits to both of these approaches. The solution to your financial woes that is best for your unique situation ultimately hinges on your personal financial picture and the idiosyncrasies of the debt in question.

The Case for Settling the Debt

Settling an unpaid debt won’t rectify the damage done to your credit yet it will keep you out of court and help you make as seamless a transition as possible to the next stage of your life. You can settle a debt without a court filing. In fact, you can even settle your unpaid debt without the assistance of an attorney or the need for financial counseling.

Opt to settle the debt and you will pay the creditor less than the sum owed, typically in the form of a single lump-sum payment. Though this option will help prevent your credit score from decreasing, even more, it won’t offset the reduction in your score that resulted from the failure to pay the debt on time.

If you choose to settle your unpaid debt, be sure to include language in the agreement that stipulates the creditor must contact the primary three credit bureaus to remove the debt in question from collection status so it can be marked as paid. If the creditor does not take this action, your credit rating will continue to suffer even though you settled the debt.

Every debtor struggling to make payments should be aware that settling debt has the potential to create even more debt. If you hire a debt settlement specialist to represent you during debt settlement negotiations, you will have yet another financial obligation, potentially surpassing the amount owed on the original debt. Though a debt settlement firm helps to save time and alleviates the pressure of negotiating the debt on your own, there is no guarantee this group will succeed in reaching an agreement that both sides consider mutually beneficial.

The Merits and Drawbacks of Filing for Bankruptcy

The other option for an unpaid debt is to file for bankruptcy. Going bankrupt wipes your financial slate clean yet it also damages your credit rating for the next 7-10 years. If you don’t plan on taking out a loan for a home, an automobile or another purchase of significance during this period of time and you won’t need credit for any other purpose, filing for bankruptcy is certainly worth considering. However, bankruptcy attorneys require fees so don’t assume going bankrupt is completely free.

If you opt for Chapter 7 bankruptcy, the entirety of the debt will be wiped out, providing you with a new beginning to your financial life. Chapter 7 bankruptcy has a downside beyond the damage to credit rating. Some states permit the seizure and subsequent sale of the debtor’s home and even additional properties.

Be sure to review exemptions in your home state with the guidance of your bankruptcy attorney before moving forward. Furthermore, if you file a Chapter 7 bankruptcy, you will have to wait another eight years before filing a subsequent Chapter 7 bankruptcy.

The alternative is to file for Chapter 13 bankruptcy that results in a repayment plan across the next three to five years. However, you will need the assistance of a bankruptcy attorney to file for bankruptcy. Chapter 13 bankruptcy mandates that you follow through with court-ordered payments across the ensuing three to five years. Review all of your options with your attorney or debt settlement specialist, carefully consider their input and you will be able to make a well-educated decision moving forward.

About the Author:
Lyle Solomon has considerable litigation experience as well as substantial hands-on knowledge and expertise in legal analysis. Since 2003, he has been a member of the State Bar of California. He serves as a principal attorney for the Oak View Law Group in California. You may contact Lyle Solomon here.