Are you wondering whether debt settlement or bankruptcy is your best option?
Depending upon your financial situation debt settlement may or may not be the best solution to your financial troubles. Below is a basic comparison of debt settlement to Chapter 7 and Chapter 13 bankruptcy. Each situation is different so it’s recommended you consult an experienced debt settlement attorney in Phoenix.
Chapter 7 Bankruptcy
Most people that file Chapter 7 bankruptcy have a low income and few assets. Chapter 7 bankruptcy allows you to discharge or eliminate most types of unsecured debt including credit cards, medical bills, personal loans, deficiency balances from a foreclosure or repossession, some tax debt and more. In order to qualify for Chapter 7 bankruptcy you have to meet certain income requirements and pass what is called the “Means Test.” If you receive a discharge in a Chapter 7 bankruptcy case most or all of your unsecured debt is eliminated.
Although Chapter 7 allows you to wipe most or all of your dischargeable debt, there are potential issues with filing Chapter 7 bankruptcy. First, if you have property that is not protected under the bankruptcy code, the trustee may sell your non-exempt assets for the benefit of your creditors. Second, a bankruptcy filing may significantly damage your credit and will show up on your credit report for up to 10 years. Another common issue with Chapter 7 bankruptcy is that your income is too high to qualify.
Chapter 13 Bankruptcy
Most people that file for Chapter 13 bankruptcy either have too high an income to qualify for Chapter 7 bankruptcy or have nonexempt assets they want to protect. Chapter 13 bankruptcy is the reorganization chapter of bankruptcy where you repay some or all of your unsecured debt through a 3 -5 year repayment plan. Some people who file Chapter 13 bankruptcy pay only a small fraction of their debt while others pay 100% of their unsecured debt. Chapter 13 bankruptcy allows you to discharge or eliminate most types of unsecured debt including credit cards, medical bills, personal loans, deficiency balances from a foreclosure or repossession, some tax debt and more. The amount of debt you repay through a Chapter 13 bankruptcy depends upon your income and property. Chapter 13 is often used to catch up on secured debt payments such as a mortgage or car loan, and may allow you to remove a second lien on a property (lien stripping) or reduce the amount owed on a secured loan. (cram down).
There are many drawbacks to filing Chapter 13 bankruptcy. First, a Chapter 13 repayment plan requires you to turn over most if not all of your disposable (leftover) income for a period of 3 – 5 years. Although some debtors filing Chapter 13 bankruptcy may pay less than 10% of their unsecured, others pay 75% or more due to their income or assets. Another issue with Chapter 13 bankruptcy is that you are under the court’s control for length of the plan. Consequently, you cannot buy or sell assets or do much of anything without asking the court’s permission. Finally, a Chapter 13 bankruptcy will negatively affect your credit score and will show up on your credit report for up to 7 years.
Most people that participate in debt settlement do not qualify for Chapter 7 bankruptcy and would be required to pay more of their debt in a Chapter 13 bankruptcy. Unlike Chapter 13 bankruptcy where the amount you pay of your unsecured debt is based upon your income and assets, debt settlement involves negotiating with each creditor to settle your debt for less than what is owed. The settlement amount varies depending upon the type of debt, the amount of the debt and the individual creditor. Although debt settlement will negatively affect your credit, the damage to your credit is generally less than if you were to file Chapter 7 or Chapter 13 bankruptcy.
As with Chapter 7 and Chapter 13 bankruptcy there are drawbacks to debt settlement. In addition to having to pay a substantial amount of debt, the amount that is forgiven by your creditors can be treated as taxable income. Another issue with debt settlement is that unlike bankruptcy your creditors are not required to settle and occasionally refuse to do so.
Deciding to file Chapter 7 bankruptcy, Chapter 13 bankruptcy or debt settlement may be one of the most important decisions you make in your life. It’s important to consult an experienced debt settlement lawyer and bankruptcy attorney to make an informed decision as to your best course of action. At Instant Settle Consultants we handle both debt settlement and bankruptcy so our attorneys can offer an unbiased opinion as to whether Chapter 7, Chapter 13 or debt settlement is your best option.