Before you finalize your debt relief option, you need to know what they are and how they are different from each other. Among the many options, debt settlement and the Chapter 13 bankruptcy is closely related to each other.
Debt settlement involves negotiating with creditor to agree to a settlement amount. When this amount is paid off, the rest of the debt is forgiven. If you are wondering how that is similar to bankruptcy, then you need to read on further.
You may think that bankruptcy only involves liquidating assets and having the whole debt discharged. That is true, but only for Chapter 7 bankruptcy. Chapter 13 involves a repayment scheme that the debtor will have to pay in order for the rest of their debt discharged. The emergence of this part of the bankruptcy law came at a time when this debt relief was being abused. Now, a means test is in effect wherein the person filing for bankruptcy will be analyzed to see if they qualify for Chapter 7 or Chapter 13. Those who earn above the average median salary of the State will immediately be directed to the latter. The only thing that possibly benefits the filer of Chapter 13 is they are able to protect their assets. By submitting to the repayment scheme, their personal properties are protected from liquidation - something that is not possible in Chapter 7.
In both cases, there is a need to be in a real financial crisis to be able to qualify for these two debt relief options. The debtors should also have a high debt to income ratio. In most cases, they have minimal income coming in. Probably the best similarity between the two is that the debtor only pays for a portion of the outstanding balance. After that, the debt is forgiven.
The difference lies in a couple of factors. In debt settlement, the whole scheme is dependent on the creditor. In bankruptcy, it depends on the bankruptcy courts. They dictate how much you have to pay and when it has to be paid. It is usually 30% to 50% of the original balance. In bankruptcy, this is more likely to come to pass. In settlement, you are at the mercy of the creditor.
Another difference lies in the credit consequences. Bankruptcy is notorious for its effects on one’s credit report. That is not an exaggeration. That taint on your record will remain for the next 10 years and your credit score will go down by a couple of hundred points. In a settlement, the record will be tarnished for only 7 years and the least number of points that you will lose will be around 50 or so. That will be greater the longer you reach a settlement and default on payments.
The time frame of the repayment plan will also vary. In bankruptcy, it can stretch to 5 years - making payments smaller every month. In debt settlement, the term is only between 2-4 years. If you want to get out of debt faster, this is will make it happen for you.
Privacy is another difference between the two. Your bankruptcy filing will become a public record. Debt settlement remains to be a private matter. The only indication that you went into this debt relief option is in your credit history wherein your debt will be tagged as “settled”.
Lastly, the fees are different too. The settlement service fee is dependent on the amount that will be forgiven. The average can reach a high of $5,000. If your debts are high, then the same goes for the fees. Chapter 13 is usually $3,000 tops.
Debt settlement is a great bankruptcy alternative but you need to consider which is best for you. Choose which among the two will serve your purpose best. It may help to consider the aftermath of each debt relief option. Whichever appeals to you the most, may be the best debt relief path that you can take.
Debt settlement involves negotiating with creditor to agree to a settlement amount. When this amount is paid off, the rest of the debt is forgiven. If you are wondering how that is similar to bankruptcy, then you need to read on further.
You may think that bankruptcy only involves liquidating assets and having the whole debt discharged. That is true, but only for Chapter 7 bankruptcy. Chapter 13 involves a repayment scheme that the debtor will have to pay in order for the rest of their debt discharged. The emergence of this part of the bankruptcy law came at a time when this debt relief was being abused. Now, a means test is in effect wherein the person filing for bankruptcy will be analyzed to see if they qualify for Chapter 7 or Chapter 13. Those who earn above the average median salary of the State will immediately be directed to the latter. The only thing that possibly benefits the filer of Chapter 13 is they are able to protect their assets. By submitting to the repayment scheme, their personal properties are protected from liquidation - something that is not possible in Chapter 7.
In both cases, there is a need to be in a real financial crisis to be able to qualify for these two debt relief options. The debtors should also have a high debt to income ratio. In most cases, they have minimal income coming in. Probably the best similarity between the two is that the debtor only pays for a portion of the outstanding balance. After that, the debt is forgiven.
The difference lies in a couple of factors. In debt settlement, the whole scheme is dependent on the creditor. In bankruptcy, it depends on the bankruptcy courts. They dictate how much you have to pay and when it has to be paid. It is usually 30% to 50% of the original balance. In bankruptcy, this is more likely to come to pass. In settlement, you are at the mercy of the creditor.
Another difference lies in the credit consequences. Bankruptcy is notorious for its effects on one’s credit report. That is not an exaggeration. That taint on your record will remain for the next 10 years and your credit score will go down by a couple of hundred points. In a settlement, the record will be tarnished for only 7 years and the least number of points that you will lose will be around 50 or so. That will be greater the longer you reach a settlement and default on payments.
The time frame of the repayment plan will also vary. In bankruptcy, it can stretch to 5 years - making payments smaller every month. In debt settlement, the term is only between 2-4 years. If you want to get out of debt faster, this is will make it happen for you.
Privacy is another difference between the two. Your bankruptcy filing will become a public record. Debt settlement remains to be a private matter. The only indication that you went into this debt relief option is in your credit history wherein your debt will be tagged as “settled”.
Lastly, the fees are different too. The settlement service fee is dependent on the amount that will be forgiven. The average can reach a high of $5,000. If your debts are high, then the same goes for the fees. Chapter 13 is usually $3,000 tops.
Debt settlement is a great bankruptcy alternative but you need to consider which is best for you. Choose which among the two will serve your purpose best. It may help to consider the aftermath of each debt relief option. Whichever appeals to you the most, may be the best debt relief path that you can take.
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