Pros and Cons of Bankruptcy vs Debt Settlement
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Struggling with large debts you cannot pay can be a nightmare, but you do have options for getting your financial life back on track. None of them are easy, but it is possible to get your debts under control and reclaim your financial future. Both bankruptcy and debt settlement can help relieve debt burdens, and an experienced debt settlement lawyer can help you analyze your options so that you can select the best alternative for you.
Ast & Schmidt, P.C. is a New Jersey debt relief law firm focusing exclusively on helping people resolve their debt problems utilizing bankruptcy protection, negotiating debt settlements and client-specific non-bankruptcy alternatives. Our team of attorneys has more than 40 years of experience helping people in Morris County, Union County and nearby NJ residents in Boonton, Denville and Flanders understand their best debt relief options and create an action plan to accomplish that debt relief. We can analyze your financial situation and discuss your debt solutions with you in a free office consultation.
What is the Difference Between Debt Settlement and Bankruptcy?
The major difference between debt settlement and bankruptcy is that bankruptcy involves legal proceedings and debt settlement does not involve a legal proceeding. In both Chapter 7 and Chapter 13 bankruptcy, you obtain an automatic stay of collection actions by all creditors during the pendency of the case while seeking a discharge of debt.
The bankruptcy automatic stay and the discharge injunction that may be granted requires the creditors to abide by them at the risk of sanctions being imposed upon the creditor who willfully violates the Bankruptcy Code or the discharge. Although creditors have rights in the bankruptcy process, they are bound by the Bankruptcy Code and do not have the ability to reject participation.
Debt settlement works differently. In debt settlement, you and you lawyer negotiate directly with your creditors to come to an agreement about the terms of the settlement. There is no court involvement in this process. Sometimes the settlement is based upon lower interest rates or reduced minimum payments. Your debt settlement lawyer can even negotiate for you to pay one discounted lump sum to your creditors to wipe the total debt clean. However, creditor participation is purely voluntary.
Is Debt Settlement a Good Idea?
Debt settlement can be an excellent way to resolve large debts if you cannot make minimum payments or have large credit card debts that you cannot pay, but debt settlement is not for everyone. One of the major challenges of debt settlement is that it is completely voluntary for your creditors.
With the help of your debt settlement lawyer, you may make an offer to your credit card company, but there is no way to ensure it will be accepted or responded to in a timely fashion. If your creditors refuse your offer, you may be right back where you started. Debt settlement works best if there are only a few creditors to negotiate with.
Another issue with debt settlement is that you usually need money available to fund the lump sum settlement. If you and your lawyer can negotiate a discounted payment in exchange for an immediate payment you must be able to pay the lump sum quickly. If you are considering debt settlement and bankruptcy, you probably do not have funds like these readily available. However, if your income has recently changed or if you have money available from family or friends to fund the lump sum settlement, your debt settlement lawyer may be able to use that information as leverage in negotiations with your creditors.
Finally, you may have to pay income taxes on any debts forgiven by your creditors. If the creditor forgives more than $600, the creditor is required to send you a 1099C for the forgiven debt. The Internal Revenue Service (IRS) treats forgiven debts like other ordinary income, so you may have to pay ordinary income taxes on the forgiven debt if you do not qualify for exclusion from the requirement to recognize the income. Debt discharged in bankruptcy is not taxable.
A qualified NJ debt settlement lawyer will go over all of these concerns with you before you make your decision on which alternative to follow. Our debt settlement lawyer in Morristown can answer any questions you may have about the pros and cons of debt settlement as they apply in your situation.
What are the Benefits of Debt Settlement?
If you can afford the lump sum payment, debt settlement can have substantial benefits if you are seeking relief from your debt. The most important benefit of debt settlement over bankruptcy is that you will be done with the settled debt as quickly as you are able to come to a settlement agreement with the creditor and pay the settlement amount. There is no required proceeding and waiting time. Depending on the type of bankruptcy, the process can last from a few months to a few years:
- In Chapter 7 cases, it usually takes about 3 to 4 months from filing to obtain the discharge.
- In Chapter 13 cases, it usually takes 3 to 5 years depending upon the commitment period required under the Means Test.
In debt settlement, you will usually pay significantly less than if you had continued forward with your creditors’ payment schedules.
Does Debt Settlement Stop Creditor Lawsuits?
Debt settlement can also prevent your creditors from suing you for payment. If you are facing a lawsuit from a creditor, it is extremely important that you contact a debt settlement lawyer who can intervene on your behalf. If you are currently struggling with payments and are worried you will be sued, moving forward with debt settlement negotiations usually stop creditors from filing collection lawsuits. Creditors will usually want to come to an agreement with you to recover at least a portion of the money they loaned.
Will Debt Settlement Hurt My Credit?
Debt settlement will affect your credit score, but it will not harm your credit score as much as bankruptcy. While it is possible to repair your credit after a Chapter 7 or Chapter 13 bankruptcy, the Chapter 7 is reported for 10 years and the Chapter 13 is reported for 7 years from the date of filing of the case. Those who pursue debt settlement may find it much quicker to rebuild their credit scores after settling because the debt is now satisfied, even if you paid only a portion of the debt you originally owed. The accounts will also drop from your credit report after seven years from the date of last delinquency, or the day after an account payment was due and considered late.
Watch Out for Debt Settlement Scams!
Debt settlement is a powerful tool, but it is important that you consult with a local New Jersey debt settlement lawyer if you wish to negotiate with your creditors. There are many organizations that market themselves as “debt settlement companies” and advertise amazing savings at little cost to you.
These companies frequently take advantage of their customers by charging high monthly rates, encouraging them to stop payments to their creditors and doing little or nothing to negotiate on their behalf. These companies have been the subject of investigation by Federal Trade Commission and several of them have been forced to close down or stop their abusive and/or fraudulent practices.
Many people who sign up for a program through one of these companies often discover too late that it is nothing but a scam to take money from them with nothing to show for it. Many find themselves facing lawsuits from their creditors with no way to recover the fees they paid to the debt settlement company.
Do I Need a Lawyer for Debt Settlement?
Our debt settlement attorneys are conveniently located in Morristown NJ. We will help you negotiate with creditors with your best interest in mind, because lawyers are bound by ethical and legal standards. Having a lawyer on your side may also help you get better results than if you attempted to negotiate by yourself. The creditors will see that you have hired legal counsel and might be considering bankruptcy as an alternative, and they may end up losing money if you file bankruptcy.
A lawyer will also stop any creditor harassment you may be experiencing. Once the creditor knows that you are being represented by an attorney, creditors are required by law to deal only with your debt settlement attorney or face legal punishment if they continue to harass you personally.
Learn More About Debt Settlement vs Bankruptcy in New Jersey with a Free Consultation
The debt settlement and bankruptcy lawyers at Ast & Schmidt, P.C. have helped thousands of people reclaim their financial lives, including successes for residents in Chatham, Whippany, Parsippany and nearby. If you are considering debt settlement or bankruptcy, we can answer your questions and will stand up for you in creditor negotiations. To set up a free consultation, contact us online or call (973) 984-1300.