Bankruptcy vs. Debt Settlement

debt-settlement-300x244Neither bankruptcy nor debt settlement is a real good option. But if you`ve become so overwhelmed by debt that you can`t pay it back, they are pretty much your only options. Both options will have a huge negative effect on your credit. The good news, however, is that, with time, that effect will lessen and then disappear.

Bankruptcy

There are two different types of bankruptcy available to individuals: Chapter 7 and Chapter 13.

Chapter 7 involves liquidation of your assets. A judge allows you to keep certain necessary property, such as clothing and a car, as well as retirement accounts and then the rest is cashed in or sold off to pay as much of your debt as possible. After your property is liquidated to pay your debts, you are absolved of responsibility for any that remain, with certain exceptions, such as student loans and tax debts.

In Chapter 13 bankruptcy, also called wage-earner bankruptcy, you are allowed to reorganize your debts to make them easier for you to repay. The court sets up a repayment plan that usually takes a few years. The purpose of Chapter 13 is to keep you out of foreclosure. The key with a Chapter 13 bankruptcy is your income. If your income is high enough, you may be required to pay back all your debts. If you have little income left over after paying your living expenses, the court may reduce the amount of debt you have to pay back. In some cases it could be as little as 10 percent of what you owe creditors.

Both Chapter 7 and Chapter 13 bankruptcies have the same effect on your credit score and, of course, it isn`t good. Depending on where your credit score is to start with, it could drop 100 to 200 points, with the higher drop coming if your credit score is higher. Both bankruptcies also stay on your credit report for up to 10 years. The only advantage to Chapter 13 over Chapter 7 when it comes to your credit is that a future lender may look more favorably on this type of bankruptcy, especially if you paid back all your debts.

Having a bankruptcy on your credit report can make it very difficult to get future loans and credit cards so its better if you contact The Pope Firm in Knoxville, TN and avail their services to protect your assets. On the other hand, it`s very important to utilize credit to help build back your score. If you have any credit that survived the bankruptcy, such as student loans, make every effort to keep them current. You should also try to get a credit card, even if it`s a secured one that you have to put down a cash deposit for. Use the card responsibly and keep current on payments to help rebuild your credit.

Debt Settlement

Debt settlement is similar to Chapter 13 bankruptcy, except without the involvement of the court. In debt settlement, you negotiate with your creditors, either on your own or with the help of a credit counselor, to pay less than you actually owe. This may be as simple as your creditors agreeing to drop late fees and penalties and forgoing some interest in exchange for you paying back the principal amount you borrowed. It may involve the lender actually accepting less than it lent you.

Debt settlement, much like Chapter 13 bankruptcy, really depends on how much money you make. The more you make, the more your creditors are going to expect you to pay back.

When it comes to your credit score, debt settlement is a much better option than bankruptcy. Having a debt settlement on your credit report will only drop your score about 50 to 100 points, so the effect is roughly half as bad as a bankruptcy.

If you are considering a debt settlement, the experts at debt relief can help you examine your options and set up a plan.

Monday, February 4th, 2013 Uncategorized

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