When you are deep in debt and considering solutions, know that you have options for debt relief. The best option for you and your family will depend on your specific situation. If you’re considering if debt settlement is better than bankruptcy, read on!
Debt settlement is settling your debts for less than the full amount owed. Filing for bankruptcy is a legal right that helps people erase debts and/or repay their debts over time. As you review your debt relief options, we strongly encourage you to consider the whole picture and consider the option that will address the entirety of your debt problem.
Ask yourself the following questions when deciding if debt settlement is your best choice.
- Do you have a large sum of cash to settle your debts?
Typically a debt settlement requires that the agreed upon amount be paid in full within a few days or weeks. Do you have a large sum of money to be able to pay the settlements? If not, then debt settlement is likely not the solution to your debt problem.
- Will debt settlement address your entire debt problem?
Are you able to settle every debt you owe? If not, then debt settlement may not the best solution to get you out of debt. If you have one or two large debts that you can settle, then settlement may be a good choice. If you have multiple creditors and/or a very large amount of debt, then bankruptcy may be the better choice for you.
- If debt settlement doesn’t address your entire debt problem, will you end up needing to file for bankruptcy?
Consider that it can be more difficult to file for bankruptcy after settling some debts. In your bankruptcy petition, depending on when you settled the debt you must disclose the settlement amount. The bankruptcy trustee assigned to your case will review your case for preferential treatment of one creditor over another. This could complicate your bankruptcy case.
- Have you considered the potential tax consequences of debt settlement?
Did you know the IRS considers “forgiven debt” income? The difference between the amount you owed and the amount you pay in a settlement is income and is supposed to be reported on your tax return as such. This could mean that you will owe more taxes at the end of the year.
Bankruptcy provides for the discharge of debt without tax consequences. Understand that bankruptcy does not erase new tax debts. This is another reason it is important that debt settlement address your entire debt problem. Otherwise, you may end up filing for bankruptcy anyway, and end up owing the IRS money you otherwise wouldn’t have owed.
- Are you trying to avoid bankruptcy to salvage your credit score?
Settled debts will report on your credit report as “debt settled for less than the amount owed.” This harms your credit score. Choosing debt settlement over bankruptcy will not save your credit score from taking a hit.
- Are your creditors taking collection action against you?
Even if you’re trying to work out settlements, your creditors will continue with collection efforts against you. This may include collection phone calls, letters, and even lawsuits that can lead to wage garnishment and bank levies.
If you file for bankruptcy, all collection action against you must stop. It is illegal for creditors to attempt to collect from you after you’ve filed for bankruptcy protection.
If you live in Savannah, GA or the surrounding areas and have questions about your debt relief options or the various chapters of bankruptcy, let’s meet for a free consultation. Please reach out to us at (912) 351-9000 or contact us by filling out this simple web form.
We are a debt relief agency. We help people file for bankruptcy relief under the U.S. Bankruptcy Code.