Bankruptcy vs Dept Settlement
The benefits of a bankruptcy over a debt settlement
One of the benefits of debt settlement is the ability to satisfy your debt in full at a lower cost. Some creditors may agree to settle your entire debt for single payment at 50 to 65 cents on the dollar. Although paying less than the balance owed presents an attractive option to individuals with large sums of cash, it offers no relief to others who lack the necessary cash. Additionally, for most individuals a debt settlement plan will only work if all of your large creditors agree to it. Conversely, chapters 7 and 13 of the Bankruptcy Code can alleviate a sudden financial calamity caused by unemployment, reduction in income, or medical emergency. Individuals whose monthly obligations have grown beyond their income should consider filing for Chapter 7 bankruptcy as a way to reduce their overall liabilities by discharging their unsecured debt and servicing only the essential obligations, such as a mortgage or auto loan.
Another benefit of debt settlement is that all fees associated with this service are paid out as a percentage on the money saved in settlement. Even though it appears as if settlement fees come off the amount saved, in reality these fees may be avoided all together when communicating directly with the creditors. Conversely, filing for bankruptcy requires sufficient expertise in the field of bankruptcy in order to file the various forms required by bankruptcy court. Furthermore, most bankruptcy attorneys charge a one-time fee that is not affected by the amount of the debt discharged. As a result, filing for bankruptcy is easier to plan for.
Lastly, before electing between bankruptcy and debt settlement it is important to realize that unlike debt settlement, bankruptcy has no tax consequences. In a debt settlement, the amount by which your debt is reduced is usually realized as taxable income for individual tax purposes. Settlement agencies often cite isolated instances where debtors do not have to report amounts saved in settlement as income due to insolvency. However, the determination of whether the debtor had a negative net worth at the time of the settlement should be made by a CPA to avoid IRS penalties and interest. Conversely, the debts discharged in a bankruptcy are not recognized as taxable income irrespective of your financial situation at the time of filing.
