Debt Settlement & Bankruptcy
- Bankruptcy and debt settlement are two options for people who have more debt than they can handle. Chapter 7 bankruptcy basically allows you to start over. If you declare Chapter 7 bankruptcy, you will no longer be responsible for the credit accounts that qualify.
Chapter 13 bankruptcy reorganizes your debt into a repayment plan of three to five years. Once that period ends, any unresolved debt is forgiven.
Debt settlement is different. It allows you to offer a one-time, lump-sum payment to your creditors. If they agree, then the debt is considered settled. Creditors sometimes accept settlement offers of as little as 20 percent of what they are owed. - Each of these three choices can have negative effects on your credit rating. Chapter 7 and Chapter 13 bankruptcy can remain on your credit report for seven to 10 years. Although your obligation to you creditors has ceased, having Chapter 7 or Chapter 13 bankruptcy on your credit report can make obtaining new credit difficult.
Debt settlement is less detrimental in terms of credit damage. If the debt is settled for less than the amount owed, that can be reflected on your report. However, you can ask that your report show that the debt has been paid, which will minimize the damage. - Before deciding on any type of bankruptcy as a solution, consider it carefully. In some cases, bankruptcy requires a partial payment of the debts before the record is wiped clean. If you have assets such as a car or property, these can be used to make up the partial payment.
Bankruptcy can also affect future employment, your chances of getting good housing, and insurance rates. Employers, landlords and insurance companies look to credit scores to help with their decisions.
Bankruptcy is a last resort. If your creditors know that you are facing this option, they might be eager to take a debt settlement offer. - One of the leading misconceptions surrounding debt settlement is that you need a debt-settlement company to negotiate for you. Your creditors will want to deal with you directly. Most will offer you the same reductions and freezes that they would through a debt-settlement company.
Another misconception is that nearly anyone can have their debt cut down significantly. Creditors will try to work with people, but options such as bankruptcy and settlement are open only to people who cannot pay. To qualify you need to show a change in circumstance, such as job loss, loss of income, divorce or illness. Those who can pay their debts are expected to do so. - Debt settlement, Chapter 13 and Chapter 7 bankruptcy damage your credit report and should not be entered into unless absolutely necessary. Before going down any of these paths, try speaking directly to your creditors. Most are willing to work with you to reach a solution.
If your debt problems are out of control, seeking the advice of a reputable credit counseling service is a good step. The National Foundation for Credit Counseling is a non-profit organization designed to help consumers with debt issues. It offers advice on your rights and on how the credit system works, and it can put you in touch with a reputable credit counseling service. You will be advised of your best course of action, whether it be debt settlement, bankruptcy or budgeting.
