Chapter 13 Bankruptcy vs. Debt Settlement: The Pros and Cons
If you’ve found yourself drowning in a sea of debt, and are wondering how you’ll ever get out, there are viable options that can help you get on the right track. While it’s stressful and overwhelming, making a decision to take control of your finances (instead of allowing your finances to control you), is the one of the best decisions you’ll ever make. If you’ve been searching the internet to weigh your options, you’ve probably seen two main solutions: bankruptcy or debt settlement. Before you make a decision, it’s important to understand the pros and cons of each.
What is Debt Settlement and How Does it Work?
Debt settlement is the process of consolidating debt relief company in order to pay off all of the debts you currently have at a lower interest rate or a negotiated payment plan. Debt Settlement companies offer to add up your debts from various creditors into a single lump sum, and in return, you pay a low monthly amount, which the debt settlement company divides and distributes to your creditors.
They also claim that they will get your creditors to “settle” your debt, meaning that you would only have to pay back part of what you owe to each creditor. While this may sound enticing, there are several disadvantages to this, as there is more than meets the eye.
The Disadvantages of Debt Settlement Companies
The first main disadvantage is that debt settlement usually doesn’t reduce the amount of debt that you owe, but rather, redistributes it. Most creditors aren’t interested in settling, and there is no guarantee that a debt settlement company will even make a reasonable attempt to get them to do so.
This means that you’re still stuck repaying your debts in full, and even though a Louisville debt settlement company will incorporate all of your unsecured debts (credit card balances, medical bills, etc.) into one large sum, you will still owe all of that money and you’ll still be paying interest on it.
The second disadvantage is that while you would technically only have one “low” monthly payment instead of several different monthly payments, debt settlement companies take a hefty fee for themselves first, then pay your creditors small amounts using what’s left over (and those amounts usually don’t even cover the minimum amount that is due to each creditor). This means that your creditors are still going to come after you, and they’re also going to report your deficient payments to the credit bureau, which will lower your credit score.
There are multitudes of debt settlement scams that lure people in with a “low monthly payment,” but then hit debtors with a high APR, as well as administrative costs and hidden fees. And again, they don’t tell you upfront that they’re going to be paying your creditors a paltry amount each month, which means that you’ll have multiple collection agencies coming after you.
If some of your debts have already gone to collections, you’ll basically end up right back where you started since debt settlement companies cannot stop collection actions, and they will continue until the debt is paid in full.
The third disadvantage is that if some of your creditors actually decide to settle your debt (meaning, they accept less than the full amount that you owe), you’ll have to pay taxes on it since the IRS will view the forgiveness of debt as taxable income. This is another additional cost that usually isn’t mentioned by debt settlement agencies.
Now you’re probably wondering, “So what exactly are the benefits of using a debt settlement company?” The honest answer is: there aren’t any.
Choosing Louisville debt settlement isn’t going to protect you, and that’s why Chapter 13 Bankruptcy is a better option.
How is Chapter 13 Bankruptcy a Better Option?
When you file for Chapter 13 bankruptcy, the court allows you and your bankruptcy attorney to negotiate a bankruptcy repayment plan with your creditors, where you can often pay off a portion of your debts over a three to five year period. You are assigned a trustee, and you make one monthly payment to the trustee that is commensurate with your income and the size of your household.
The Advantages of Bankruptcy
The disadvantage of filing bankruptcy is that this brings your credit score down. However, the first advantage of this is that if you have too much debt that you can’t possibly repay, a Chapter 13 bankruptcy will discharge most unsecured debts, such as unpaid rent, utilities, credit card debts, and medical bills (which means that you don’t have to pay it all back).
Another advantage is that Chapter 13 bankruptcy in Kentucky gives you protection from your creditors. Once you officially file for bankruptcy, an “automatic stay” goes into effect, which means that all collection actions will cease, including wage garnishment, car repossession, and home foreclosure. When you opt for debt settlement in Kentucky (or any other state), you don’t have this protection.
Finally, the most important advantage of Chapter 13 is that it gives you the chance to start over in regards to your finances. When part of your debts are discharged, you not only have the opportunity to regain solid financial footing, but you can also let go of the immense stress that comes with an overwhelming amount of debt that is impossible to repay.
If you’re considering bankruptcy, and want peace of mind that things will get better, come in for a free consultation where we can discuss your options.
Call me today at (502) 435-2593 to take the first step toward financial freedom!
Written By – Tracy L. Hirsch
Louisville Bankruptcy Attorney
Tracy has focused the majority of her legal career as a debt relief lawyer, advising her clients on how to get a fresh start and rebuild their lives so that unfortunate situations won’t devastate their families forever.
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