Before reading the article, take a moment to confirm that you are eligible for Chapter 7 bankruptcy by filling out our online bankruptcy evaluation. If you have already confirmed this, continue reading…
While our firm advises clients on their options with bankruptcy, the reality is that bankruptcy is not the only choice. There are several options to consider when making the decision to take control of your financial life. The most common option is debt settlement. While debt settlement is a good option for some, consider the following when making the decision between debt settlement and chapter 7 bankruptcy.
First, consider the amount of debt involved relative to your situation. If the debt is a small amount relative to your income, it probably makes sense to try to settle with the creditor. If the debt represents a significant amount of your income, it may take years and thousands of dollars in debt settlement fees before you may actually settle the total debt. In that case, debt settlement is probably not the right option and bankruptcy may be your best choice. Most people are somewhere in-between these two choices. If that is your case, continue reading.
Once you have looked at the total debt involved, you should next consider the type of debt. What does it mean to consider the type of debt? In bankruptcy, there are only a few types of debt that are dischargeable (meaning that they will be discharged or forgiven if you were to file for bankruptcy). If the debt is secured by a home, vehicle, furniture, or other item, it is not dischargeable. Thus, a creditor has a right to either collect that debt or take back the secured property. Because these debts are nondischargeable, they will not be forgiven in bankruptcy. Thus, bankruptcy is not a good choice because it will have limited effect on your debt. However, most people have debts in the form of credit cards. Credit cards are unsecured debt and are dischargeable in bankruptcy. Thus, if your debts are mostly credit cards, bankruptcy may be a good option for you.
Finally, when choosing between bankruptcy and debt settlement, an individual should consider their personal situation and the effect on their credit. A bankruptcy filing can stay on your credit for up to ten (10) year. However, most clients find that their credit quickly improves after bankruptcy because they no longer are delinquent on debts and because they are a much better credit risk. So while many clients worry about the effect on their credit from filing bankruptcy, the effect to credit is not as significant as most fear. In addition to effect on credit, it is important to consider your current situation and goals. If you hope to purchase a home, car, start a new job, a poor credit rating can adversely affect your ability to do those things. While your credit will likely take a hit with debt settlement, it will not carry the mark of bankruptcy. If you already own a home, car, and maintain steady employment, credit may be less of a concern and bankruptcy may be the best choice.
While it may not be easy to make the choice between debt settlement and bankruptcy, it is important to make a decision as soon as you know you will have trouble paying your debts. In many cases creditors will work out payment plans or deferment to help you catch up on overdue bills. If you find that creditors are not happy with this option you still have the option to pursue bankruptcy. For more information on this article and other factors to take in account when deciding to file bankruptcy, call us today at (877) 292-9759.
This post was written by Benjamin Yrungaray
Benjamin Yrungaray handles bankruptcy and loan modification cases at First Source Law. He is a member of the state bars of California (#256224), Pennsylvania (#208558), and New Jersey. He is also admitted in the Central District Court of California, Southern District of California, and New Jersey District Court.
