How a Debt Settlement Plan Compares to Bankruptcy Protection

Financial troubles can be overwhelming. It is important to consider your best options, and the potential impact of filing for bankruptcy or seeking debt settlement. You want to make the best decision to get on the track to a more financially secure future.

Debt Settlement Plan

An attorney or a debt settlement company can negotiate with creditors for the debtor to reduce total debt repayment. It is also possible for individuals to negotiate on their own behalf. The creditor may allow this in situations where they know they are not likely to get paid otherwise. Generally, this option is reserved for unsecured debts like credit cards and medical bills. This is a better alternative to the creditor than bankruptcy because they will get some of the money they loaned back.

Impact on Credit

Debt settlement can negatively impact credit by showing up on credit reports. Sometimes creditors will negotiate with the debtor regarding negative credit reporting, which can save the debtor's credit. In some cases, the cancelled debt must be reported as income. It is important to be aware of the tax consequences because the additional expense of added tax could put some debtors in a position of not being able to make good on their debt settlement plan. Because it is an agreement between the parties, if the debtor does not fulfill his obligations under the plan, the creditor has the right to sue for repayment.

While the process of negotiations goes on, it is possible that creditors may sue individual debtors who are delinquent on repayment for payment in full. Any agreement to a settlement plan and agreements regarding credit reporting should be documented to protect the debtor.

Bankruptcy Protection

During a bankruptcy proceeding, creditors have the right to protest the dissolution of debts. Once the bankruptcy is approved by the court, including a repayment plan in the case of Chapter 13, the creditor no longer has this option (unless they can prove fraud, abuse, or some other extreme circumstance to the court). If a particular debt is included in a bankruptcy filing, the creditor is forced to accept the court's ruling and can no longer seek repayment from the debtor.

Getting Legal Help

To decipher the complexities of the consequences of bankruptcy and debt consolidation, it is best to discuss your particular needs with an attorney. Getting help from a professional will help you to stay informed about your rights and options. Also, an attorney will be well versed in negotiating with creditors and filing any appropriate paper work.