Why You Should Consider Debt Settlement vs Bankruptcy

Most credit card companies aren’t interested in helping the customer lower their fees and pay less interest. The same goes for loan agencies, banks, and even the IRS. The financial industry doesn’t have the greatest track record of working with people who fall on tough times, and it seems like companies want to punish those who fall behind and need help.

Everyone knows that these organizations make their money by charging their customers high fees and all that interest, and they will do and say whatever they have to in order to collect. It’s what keeps them in business. Some companies have gone as far as to threaten customers who are past due with harassing (and sometimes illegal) collection calls or letters, to try scaring them into making payments.

This intimidating practice has caused many Americans to turn to what they think is their only option: filing for bankruptcy.

Bankruptcy Isn’t Your Only Option

Most bankruptcy filings today are due to financial hardships rather than reckless spending, and many people who file are low-income individuals who simply can’t afford to deal with unexpected major expenses such as the loss of their job or extensive medical bills. The correlation between difficult economic times and an increase in bankruptcy filings can be seen throughout history. Most recent statistics show a total of 1,071,932 cases filed in 2013, compared to the 1,572,597 cases that were filed in 2010 during the peak of our most recent recession.

So while those harassing credit card companies will go to many lengths to try to collect from the consumer, they are all hoping at the same time that the customer does not decide to give up and file for bankruptcy. They know that if you decide to discharge your debt, then they will not receive any of the money owed to them, and they certainly don’t want that.

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Bankruptcy remains on an individual’s credit report for 7-10 years (depending on the type filed), and will impact your ability to obtain new lines of credit and even in some cases can keep you from obtaining certain jobs. It is also not the solution for every type of debt, and many things such as alimony, child support, unpaid taxes, most student loans, and several other things are not included.

Filing for bankruptcy is considered among the top 5 negative things that a person can go through in life (right up there with divorce and the death of a loved one), and can create long-lasting stress that will impact areas other than the pocketbook. For this reason, filing for bankruptcy should be an absolute last resort.

Additionally, some debtors do not qualify for a Chapter 7 and would be required to pay back more through a Chapter 13 than what he or she would in a debt settlement.  In some debt settlement cases, you may be able to settle your debts for 40%-60% of what you owe.

Consider Debt Settlement

Working with a debt settlement organization can provide you a solution that allows you to pay off your debt in a way that doesn’t break the bank and keeps everyone happy.

A reputable debt settlement company will evaluate your total debt picture and contact each of the companies you owe to negotiate a settlement that is more reasonable. They can also lower your interest rates, eliminate other costly fees, and make your financial situation much more bearable.

While you can certainly try contacting each of your creditors yourself to request lower interest rates or some form of payment deferment, the chances of them working with you to the fullest possible extent is not likely. Creditors have gotten used to working with debt settlement organizations who negotiate bulk deals. Oftentimes they feel the customer is more serious if they have utilized the services of a company like this to help them resolve their debt.

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How A Debt Settlement Firm Can Help You

A good debt settlement firm will help educate you on what your best option is. If a debt settlement program is the route pursued, a good debt settlement firm will help you to re-establish credit after succeeding to resolve your financial burden. Additionally, programs offered by reputable debt settlement firms are performance based, which means you won’t be charged any fees until a settlement has been reached.

Debt settlements are not without their drawbacks.  In a debt settlement you may be issued a 1099 for the amount that the creditor did not require that you pay. This is called debt forgiveness and is taxable if your assets exceed your liabilities up to the amount forgiven. For example, if you are issued a 1099 for $20,000 that you saved and your assets exceed liabilities by only $10K, then only $10k is taxable.  Note that if you have a retirement plan this will be counted as an asset in a debt settlement but retirement plans are exempt under bankruptcy.

With all things considered, debt settlement is often the best option for people who find themselves drowning in unsecured debt. Once you’ve enrolled in a debt settlement program you may be able to finally breathe knowing that you are in the trained hands of professionals.

Check out SuperMoney’s list of best Debt Settlement companies reviewed here.

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