So what is better, debt settlement or bankruptcy?

So you have decided to tackle a debt problem. Congratulations — but you may immediately stumble on the question of just how to do it. For instance, should you sign up with a debt settlement company, or just declare bankruptcy?

If you own a radio or a television, you can’t get away from a constant barrage of debt settlement advertisements. At first it sounds good, but let me tell you how these companies typically work.

If you agree to sign up, the company will have you sign a contract that allows them to deduct fees from what you send them every month. These fees will be large — 50% of more of what you send in. They will take monthly payments from you, with the idea that you will build a fund for settling the debt. Then at some unspecified time in the future, after your fund has grown, they say they will strike settlement deals with your creditors for some percentage on the dollar. Many claim to erase about half of your debt.

But because the debt settlement company’s fees are large, it takes a long time to build your account up to any meaningful level. In the meantime, nothing is getting accomplished. Your stress level may be just as bad as if you had done nothing. You may even be worried about how you are going to make the payments to the settlement company. Plus, you may have been able to settle with your creditors for 50% just by calling them up yourself (maybe, maybe not, a little persistence sometimes pays off here).

Now, contrast this scenario with going to see a bankruptcy attorney from the get go. In a simple Chapter 7 case, all of your unsecured debts can often be erased 100% in a matter of a few days. Bankruptcy prevents your creditors from bothering you by phone, mail, or any other method, and your attorney has the skills to see that this law is enforced — or else. As far as your credit rating goes, there probably is not going to be much difference, given that the debt settlement strategy is going to have you skipping all your regular debt payments and going in to default on your credit accounts by not paying on time.

But attorneys cost money, don’t they? Of course they do. But you quickly pay more in those monthly fees to the debt settlement companies than the attorney fees and the court fees combined would cost.

Finally, if you go the debt settlement route, even if you are successful, you have to ask what is accomplished. For instance, if you have $30,000 in credit card debts, and you do manage to settle them for 50 cents on the dollar, will you in fact have $15,000 to pay the settlement? Someone who files for bankruptcy and manages to save $15,000 after the filing will be able to put that money toward rebuilding their lives.

For most people, in most circumstances, debt settlement firms should be avoided.

 

By Doug Beaton

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