Is Bankruptcy Better Than Debt Settlement?
Wondering you should file bankruptcy instead of trying debt settlement? You’ve come to the right place.
But first, in case you haven’t noticed, I’m a bankruptcy lawyer. What you’re about to read might be a little biased. Do your research and make a decision that is best for you.
1. Bankruptcy stops all collection action – When you work with a debt settlement company, they will instruct you to stop paying your bills and start sending them the money you normally send to your creditors. The plan is to pool this money and use it to settle your debts. In theory, this is a good idea. Generally, creditors are more inclined to settle with a lump sum offer. However, it could take months for you to accrue enough to settle with even some of your creditors. In the meantime, those creditors are going to continue their collection efforts, including suing you.
More than a few times, I’ve had clients who tried to work with debt settlement companies that weren’t able to negotiate with all of their creditors. Suddenly, their employer tells them they’ve gotten a garnishment order and will be taking money out of their paycheck next payday. If a debt settlement company can’t negotiate all of your debts, you’ll be fighting on several fronts with all of your creditors.
Filing bankruptcy stops all collection action. It immediately stops lawsuits, repossessions, garnishments, and foreclosures. They also have to stop calling and texting you. Imaging the relief you’ll feel when that happens.
2. Bankruptcy provides a clear path to a fresh start – Unlike debt settlement, when you file bankruptcy, you know for certain that you are getting a fresh start. All dischargeable debts are eliminated, and you can begin rebuilding your financial future immediately. When you settle with your creditors, you may have to confront old debts down the road if the creditor decides to sell its collection accounts.
Debt settlement will negatively impact your credit score for seven years after you complete all payments. Bankruptcy will also impact your credit score for up to 10 years, but most people will see a significant increase in their credit score within 12 months of filing. In my experience, my clients have seen a mid-600 to low-700 credit score within the first year after filing. Bankruptcy will reset your credit report. It will eliminate negative reporting, like repossessions and late payments. It will also reduce your debt to income and your debt to credit ratio.
3. Bankruptcy doesn’t affect your tax refund – When you settle a debt for less than you owe, your creditor is going to send you a tax document, a 1099, which states the amount of forgiven debt. When you file your tax return, you will have to claim the forgiven amount as income, which will obviously have an effect on how much taxes you owe. Bankruptcy does not require you to pay any taxes on the debts that are discharged in your case.
While we’re on the subject of taxes, settling a debt for less than you owe can be a “taxable event”. In certain situations you may have to pay taxes for any debt that has been forgiven. Let’s say you’ve negotiated to pay Visa $5,000 for the $10,000 debt you owe. They might accept the offer, but if they do, at the end of the year you’re going to get a 1099-C. You may have to pay taxes on that $5,000 that was forgiven. There are no tax consequences for filing bankruptcy. You should talk to a tax professional to see how debt settlement may affect you.
Talk To A Denver, Colorado Chapter 7 And Chapter 13 Bankruptcy Lawyer To Find Out Your Options
If you have any questions about whether bankruptcy is your best option, you should talk with a Colorado bankruptcy lawyer. We offer free consultations for individuals and small business who would like more information about bankruptcy.
The easiest way to schedule an appointment that is convenient for you is by visiting our scheduling page.