Asking whether you should settle debts or file bankruptcy is a common question consumers have when struggling to keep up with monthly debt obligations. The answer to whether you should settle debts or file bankruptcy depends on several factors and therefore you should take the time to learn about all of your options before taking action to tackle your debt.
Are Promises Made in TV Commercials For Debt Settlement Companies Legit?
The answer is almost always no. Most debt settlement companies including the nationwide debt settlement companies that advertise on TV or radio appeal to consumers who genuinely want to repay their debts but are looking for a magic answer to all their problems that will help them avoid filing for bankruptcy.
While many debt settlement company options sound great by offering a plan and a solution to consolidate your debts into one monthly payment, they often times fail to clearly explain to the consumer how this plan will be carried out and how it will affect you moving forward which is very important when determining whether you should settle debts or file bankruptcy.
What Should I know about Debt Settlement?
(1) In order to settle debts in many cases, you must be delinquent on your payments.
This is because it does not make good business for a credit card company to offer a settlement to somebody who pays their minimum payments every month while the balance continues to rise. Once you stop paying on the debt, usually for at least 6 months, the debt may be charged off and sent or sold to a collection company or law firm or a collection department of the credit card company designed to recoup what they can from you and make offers for less than the full balance.
(2) If You stop making payments and do not have funds available to settle with the creditors, you may have a civil lawsuit filed against you.
If a judgment is entered against you and you did not respond to the lawsuit or were unaware of it for whatever reason, your wages can be garnished and it will report as a judgment on your credit report. Once a judgment is entered against you, it becomes much harder to negotiate a settlement for less than the full balance.
(3) If you stop paying on your debts, often times the late payments or charge offs will report on your credit report and stay there for up to 7 years, even if you settle with the creditor at a later date. The account should eventually be reported as settled for less than the full balance once it is settled.
(4) If you have more than $600 forgiven by a creditor, then you may have to pay taxes on any debts that are forgiven.
(5) If you have 2 or more creditors file a lawsuit at the same time and you don’t have funds on hand to settle with them, what are you going to do? You may end up having to file bankruptcy anyways at this point.
(6) National debt settlement companies typically charge 15% of the total balance that you enroll in their program. When you factor in this fee in addition to having to pay taxes and damaging your credit, is it really worth hiring a national debt settlement company? With that said there are some legitimate company’s who may charge a low flat fee to negotiate your interest rates down which may be a better option compared to actually trying to settle your debts.
In Washington State there is a debt adjusting law on the books under RCW 18.28 in which a debt adjuster or debt adjusting company can retain no more than 15 percent of the total amount of any payment made by a debtor. The statute also requires that debt adjusters pay at least 85 percent of each payment received by a debtor to their creditors. If a debt adjuster contracts for, receives, or makes any charges beyond the maximums permitted by law, the debt adjuster’s contract with the debtor may be void. The debt adjuster is then required to return all money it received from the debtor and not distributed to creditors. Finally, any payments received by debtors must be placed in a trust account by the debt adjuster and their services billed against the trust account. Failure to follow any of these requirements could result in an action by the Washington state attorney general if reported. It should be noted that lawyers or law firms practicing in Washington may be exempt from this law if the representation is in association with legal services.
(7) Some creditors will not negotiate a settlement for less than the full balance. Credit Unions and medical debt can often be quite stingy in their negotiations as well as any creditor who already has a judgment obtained against a defendant.
(8) Many national debt settlement companies are not law firms or lawyers and cannot represent you in court should a lawsuit be filed against you. They may say they can refer you to a local attorney or they partner with one should a lawsuit come up, but that may cost you more out of pocket expense and you may be on borrowed time if you get several lawsuits filed against you if the accounts are not settled in a timely fashion as you may not have enough funds built up.
If you are already delinquent on your debts and now have a lump sum to settle your debts with, debt settlement may make a lot of sense, but I still would not advise hiring a national debt settlement company as they may be in violation of the Washington State debt adjusting law and you may end up paying more than you would have paid through local debt attorney or alternative options. Most lawyers who deal in bankruptcy or debt issues can help you negotiate settlements for a flat fee, rather than giving a percentage of your overall debt to a national debt settlement company.
Should You File Bankruptcy instead of Settling Your Debts?
Bankruptcy can sound complicated and scary, and it does in fact have a lot of complex laws that a qualified local bankruptcy attorney can help you navigate, but the truth of the matter is, chapter 7 or chapter 13 bankruptcy may make the most sense for most consumers who are struggling to answer the question of whether to settle debts or file bankruptcy.
A bankruptcy can eliminate most types of debts and can allow for no payments in chapter 7 or a payment plan in chapter 13 bankruptcy, often times for less than the full balance of your debts. Whether you can qualify for chapter 7 bankruptcy will depend on your household income, asset value and family size among other factors. These same factors would also help determine what you might have to pay back to your creditors in a chapter 13 plan.
In many cases consumers will save significant money over the long term vs. debt settlement or at a minimum and chapter 13 bankruptcy can allow for a repayment plan over 3 to 5 years while being protected from any creditors who may want to collect against you. This is because of the automatic stay in bankruptcy in which creditors are forbidden from collecting on a debt once the bankruptcy case is filed. It should be noted that if you are in a chapter 13 repayment plan, you cannot incur new debt while in the bankruptcy plan and you must include all of your debt in the plan. Furthermore, a bankruptcy in can report on your credit report as a public record for up to 10 years. This can sometimes steer consumers away from bankruptcy, but be assured that you will qualify for new credit as soon as you are finished with your bankruptcy case and can even qualify for a home loan in 2 years after filing chapter 7 bankruptcy and immediately after finishing a chapter 13 plan.
In most cases bankruptcy allows consumers to get on with their lives, without having to worry about creditors who may show up at of nowhere to file a lawsuit or collect a debt. While there are many cases in which debt settlement may make sense, such as a consumer may lose property in a Ch. 7 case, only has a small amount of debt, or cannot afford payments in a chapter 13 plan because they own assets of significant value, in many situations bankruptcy is the better option.