Pros and Cons of Debt Settlement Instead of Bankruptcy
Consumers who are overwhelmed by debt and cannot make their payments may choose between filing bankruptcy or settling and consolidating their debts privately. Each of these measures has advantages and disadvantages that should be carefully considered before deciding which path to take.
Debt settlement and consolidation require negotiation with creditors. This can be done directly or with the assistance of an attorney or debt settlement representative. The outcome can be a lowering of interest rates, extension of repayment time and even reduction of loan principal. Through debt consolidation, multiple debts can be rolled into one loan, often at more favorable terms.
Both debt settlement and bankruptcy have a negative impact on the individual’s credit rating. However, a debtor’s credit may recover faster through private settlement if the debtor is able to keep up with all bills moving forward. Also, there is no publicly available record of debt settlements. Only those with access to the individual’s credit report will know that debts have been settled for less than full value.
There are some disadvantages to private settlements. The process is voluntary so the creditors cannot be forced to negotiate or come to an agreement. Most settlements are for 25 to 50 percent of the outstanding account balance. That means the debtor must raise a significant amount of cash to satisfy a settlement agreement. Further, most forms of debt forgiveness is considered taxable income.
By contrast, a Chapter 7 bankruptcy usually allows the debtor to discharge all unsecured debts, usually in as little as six months. Another advantage is that an automatic stay goes into effect once the Chapter 7 case is filed and generally remains in effect throughout the bankruptcy case, stopping collection of all dischargeable debts. Once the case is completed, the debtor can immediately start rebuilding their credit rating. Also, debts discharged in bankruptcy are not treated as income for tax purposes.
However, there are some negative consequences to filing for bankruptcy. The court case is public and the records remain available even after the case is closed. A bankruptcy stays on the debtor’s credit record for either seven or 10 years depending upon the type of filing. This can impact an individual’s career or business opportunities.
Both debt settlement and bankruptcy are important tools for consumers to get a fresh start with their finances. Which alternative is best is highly dependent on the debtor’s individual needs and circumstances. One should consult with an attorney and thoroughly hash out all details before choosing a debt solution.
The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s largest bankruptcy law firms, with 12 offices throughout the region. If you are in financial distress and wish to discuss debt relief options, contact us online or call 310-271-6223 to schedule a free initial consultation.