Bankruptcy or Debt Settlement?

Today, debt is a fact of life. But if you let your debt get out of hand, it is very difficult to fight your way back to financial stability. In you become severely overwhelmed by debt, there are essentially two options: bankruptcy or debt settlement.

Depending on your situation, bankruptcy might be the easier way out. A large part of your debt, if not all of it, is forgiven, and you get a second chance to get your financial act together. The downside is that your credit score is ruined for the next few years.

Debt settlement, on the other hand, usually involves a consolidation of your credit lines and/or loans. You will still pay most of the amount, but your creditors will allow you to make lower payments and, at times, even re-negotiate the interest terms. Knowing which option to take requires that you do some research into your financial situation first.

Evaluating Your Debt Problem

The first thing to do is get a copy of your credit report from all three major credit tracking agencies (Equifax, TransUnion and Experian). By law you are entitled to one free credit report for every 12-month period.

Go over your report carefully and check for any inaccuracies. If you find any, contact your creditor to get it fixed. Also, keep your FICO score in mind. Add up the debt you have and come up with at total. This will include secured and unsecured debt as well as collection accounts. All of this information will come in to play when you sit down to decide whether you should file for bankruptcy or seek settlement.

Your Monthly Expenses

Part of evaluating the severity of your debt problem is to see how much money you spend every month versus how much money you make every month. On paper, add up all of your monthly income. Include paychecks, alimony, child support, investment returns and any other sources of income you might have. Then, determine how much you spend every month. Restrict this to mandatory living expenses, like rent or mortgage, transportation, insurance, medical expenses, utilities, and school related expenses. Do not include entertainment or other discretionary expenses.

Then, subtract how much you spend from how much you make. This will give you your monthly expendable income, with which you could potentially pay down your debt. Banks will need to know this figure whether you decide to file for bankruptcy or settlement.

Debt Settlement

If you have expendable income left over after subtracting your monthly mandatory expenses, then debt settlement might be a good option for you. To qualify for debt settlement, a debt settlement company will usually require that you have an unsecured debt of at least $7,500. However, this amount varies depending on the company.

Once you’ve decided that you want to proceed with the debt settlement option, take some time to search for a reputable debt settlement company. There are many companies out there whose main aim is to get as much money out of their clients as they can. They will charge high, up-front fees for their services, and you will usually end up with more debt by the end of the ordeal. Make sure that the company you choose is endorsed by the Better Business Bureau or some other legitimate consumer-oriented federal organization.

And make sure to shop around. Compare services and look for companies with good histories, references and past cases that you can look at. Don’t hesitate to ask questions about what their debt settlement program entails. A good company will be happy to answer anything and present you with a specific, long-term credit recovery, debt payment plan and management plan, so that not only will you get out of debt, but avoid it in the future as well.

Bankruptcy

If after calculating your monthly expenses and your monthly income you determine that your monthly expendable income is in the negatives then bankruptcy might be a better option for eliminating your debt. But while bankruptcy eliminates a good portion of your debt and allows you, in a sense, to start over, keep in mind that it also ruins your credit score, something that will take several years to fix.

That said, if you decide to pursue the option of bankruptcy, read the U.S. Bankruptcy Code to determine if you qualify. It is a complicatedly-worded document. Consult with your lawyer if you have difficulty understanding it. There are also books published which seek to present the Bankruptcy Code in plain English. There are different kinds of bankruptcies. Study each bankruptcy chapter to see which one applies to your situation.

The Court costs for filing bankruptcy vary depending on which chapter you file under. Usually it’s somewhere around $250 - $300 for Chapter 7 and Chapter 13, the most common ones. You will also need to find out how much your lawyer will charge to represent you in a bankruptcy case. Shop around. You will have to meet with each attorney individually, in person, to discuss your case, as bankruptcy law is complicated and requires a full discussion your specific financial picture.