Note: This is not legal advice, but instead practical information that applies to the majority of cases. Please do not rely upon this information without a consultation with a qualified attorney. Prepared By Chris Rampley, Attorney at Law

7 Ways Bankruptcy is Better Than Debt Settlement

September 17, 2017

The one option that shines above all the rest is bankruptcy. It’s the cheapest and fastest and the best way to rebuild your credit.”

-Steve Rhode, a former credit counselor who runs the popular personal finance website "Get Out of Debt Guy". 

 

 

Bankruptcy attorneys usually have strong opinions about other debt management tools because they can see the harm that is done by other debt relief providers, especially debt settlement companies.

 

There are many reasons why Bankruptcy is usually the best way to handle out of control debts, especially when compared to debt settlement. Here are just a few:

 

(1) Debt Settlement Does Not Stop Lawsuits, but Bankruptcy Does

 

Debtor Settlement - Debt settlement companies will tell you to not pay your debts while they try to settle over the course of months or years.  However, that does not stop collection actions.  All it takes is one creditor to be unwilling to wait and they file a lawsuit and a garnishment and then your whole Debt Settlement plan is useless. We see this all the time and people are often amazed that they can still be sued while in a Debt Settlement Plan.

 

Bankruptcy - When a Bankruptcy is filed the Judge issues an order creating the "Automatic Stay" which prevents lawsuits, garnishments, foreclosures, and repossessions.

 

 

(2) Debt settlement is taxable.  Bankruptcy is not.

 

Debt Settlement - If you settle a $15,000.00 debt for $5,000.00, you did a great job. However you will soon get a 1099 from the creditor for the $10,000.00 that you didn't have to pay as part of the settlement! Now this is not the creditor being "crooked", it is the IRS being the IRS. The IRS considers debts that don't have to be paid as "income".  Congratulations! You now have to pay taxes on $10,000.00 that you do not have.

 

Bankruptcy - If the debt is discharged in bankruptcy the $15,000.00 debt simply goes away with no tax consequences. Even if a 1099 is issued afterwards the IRS will not tax you on the $10,000.00 if you fill out the proper form.   

 

(3) Debt Settlement is long and does not protect you from all of your creditors, and you usually pay a LOT more than you would in a Bankruptcy. 

 

"Negotiations can take years. Customers are told to stop paying their credit cards, loans and other debts and funnel money instead into a savings account. Freedom Financial Network, the largest debt settlement company, says half of its customers eventually settle at least 75 percent of their debt, but the process usually takes three to four years. Meanwhile, customers risk being sued over their debts."

Source: Liz Weston - a columnist at NerdWallet, a certified financial planner and author of “Your Credit Score.”

 

 

(4) Debt Settlement math often doesn’t work.

 

"Debts are normally settled for 45 percent to 50 percent of the current balance, which is often higher than the initial balance because of late fees and interest. The typical debt settlement fee is 20 percent of the debt at the time of enrollment. The amount of forgiven debt is usually reported to the IRS and is usually taxable as income. If the borrower is in the 25 percent federal tax bracket, the total cost of the settlement can equal 90 percent or more of the original amount owed."

Source: Liz Weston - a columnist at NerdWallet, a certified financial planner and author of “Your Credit Score.”

 

 

(5) Some Debt Settlement Companies will "bend the truth" about Bankruptcy and Property Loss

 

Many debt settlement companies unfairly demonize bankruptcy. National Debt Relief, another large debt settlement company, claims on its website, “Declaring Chapter 7 bankruptcy may mean saying goodbye to most of the assets that you’ve accumulated over the course of your life.” In reality, few people who file for Chapter 7, which erases most debts in three to six months, lose any assets thanks to state laws that typically protect most if not all of what filers own.

Source: Liz Weston - a columnist at NerdWallet, a certified financial planner and author of “Your Credit Score.”

 

 

(6) Some Debt Settlement Companies will "bend the Truth" about Bankruptcy and Credit Scores

 

Settlement companies also claim that bankruptcy is harder on credit scores. In reality...Credit scores can begin to recover immediately after either process is complete. The difference, of course, is that Chapter 7 bankruptcy typically takes months, while debt settlement typically takes years. Plus, bankruptcy halts collections activity, including lawsuits, and can end wage garnishments.

Source: Liz Weston - a columnist at NerdWallet, a certified financial planner and author of “Your Credit Score.”

 

 

(7) Bankruptcy Attorneys are "fiduciaries" which means that they must keep your best interests in mind. Debt Settlement companies are NOT fiduciaries and do not have to tell you all of the options - even if those options are better for you!

 

Steve Rhode warns. “Credit counselors hate debt settlement companies, debt settlement companies hate bankruptcy attorneys, and bankruptcy attorneys (don't like them either)". However, "Only bankruptcy attorneys are required to put their clients’ interests first; other debt relief providers aren’t required to tell you if other options might work better."

-Steve Rhode, a former credit counselor who runs the popular personal finance website "Get Out of Debt Guy". 

 

 

 

CONCLUSION

 

It should be clear, for the reasons mentioned above, that Bankruptcy Attorneys generally do not recommend Debt Settlement.  However, in some relatively rare cases Credit Counseling or Debt Settlement might be a better option than Bankruptcy.  A Bankruptcy attorney has the duty to tell you that if those options would be better for you even if it means that you will not end up hiring the attorney!  

 

Here is my promise to you: Bankruptcy is so powerful that is the correct answer for over 90% of people with serious debt problems. However, if you come in for a consultation we see what is best for YOU: Debt Settlement, Credit Counseling, Filing Bankruptcy, other options, or even doing nothing at all!

 

Chris Rampley and Staff

 

 

 

 

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