Similarities Between Bankruptcy And Debt Settlement
Losing the ability to meet financial obligations can be quite traumatic. It is a situation that quickly degrades from a few late or missed payments to harassing phone calls and threatening letters. Under some circumstances, you need help regaining control. One possible solution is debt settlement. This is an agreement between creditor and debtor to accept less than the total balance as payment in full.
Debt settlement is where a debtor and creditor agree on a lesser sum to be accepted as payment in full. If you have ever been in that situation, this may seem like a magic bullet. Beware, there is very little regulation in this industry which makes it somewhat perilous for the consumer.
Fraud is by far the biggest. There are many fly by night companies willing to take your money and disappear once they have it. Many more lack experience in the field. Either way, both will take your money and not deliver.
Seeking professional advice to navigate the choices is wise. A seasoned bankruptcy attorney can help determine which solution is better for you. Regardless, the goal is to become debt free.
Comparing the two will provide a simplistic overview of the differences that set them apart. Filing a chapter 7 bankruptcy enables you to wipe out debt immediately. Upfront costs are usually cheaper than negotiating and the entire process is over in a matter of a few months rather than years. When you no longer owe creditors you are free to start fresh. There is also a greater chance of losing your home and other personal property.
In relation taking the alternative route can prove to be more time consuming and expensive. Settling can take up to four years, but will help to avoid bankruptcy and unfair collection practices. Late fees and over-the-limit fees associated with credit card debts are eliminated and you will make only a single monthly payment to the settlement company. The difference between what you owe and what you pay is considered taxable income by the IRS, so you may end up with an extra tax burden.
When choosing a company to represent you, know what to look for. Company reputation speaks volumes. You want a company with a proven track record and positive client testimonials. Check for accreditation like a BBB report or certification from TASC (The Association of Settlement Companies) or the IADPA (International Association of Professional Debt Arbitrators). Ask about costs and fees before proceeding.
There will be damage to your credit score no matter what. It is an unfortunate side effect of the situation. Luckily, it is repairable by acquiring and using new credit responsibly.
The federal government does not regulate these types of companies, but the Federal Trade Commission has recently imparted a few rules. Upfront service fees cannot be charged until at least one account is settled and there is a written agreement between you and your creditor.
Illinois has enacted the Consumer Proposal Toronto. It provides that upfront fees are capped at $50 and total fees will not exceed 15% of the total value saved. Currently, there are no other states trending this practice.
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