Sometimes debt becomes overwhelming for individual consumers and businesses. When the debt is no longer payable and is significantly impacting your personal or business life then it is time to consider your options for taking care of the debt. Your options include filing for bankruptcy or entering a debt settlement.
Generally Bankruptcy:
Allows a debtor to either liquidate assets or develop a repayment or reorganization plan to satisfy his or her debts;
Creates an automatic stay that prevents creditors from contacting debtors directly; and
Can result in a discharge that provides a debtor with a fresh financial start at the completion of the bankruptcy process.
A Debt Settlement:
Allows a debtor to pay off a debt for less than the amount of the outstanding debt;
Can be accomplished by an individual or a debt settlement company; and
Can result in significant negative economic consequences for the debtor.
When to File Bankruptcy Instead of Debt Settlement
Generally, if you have more than one debt that is significantly past due and you are in financial trouble then you should file bankruptcy rather than enter individual debt settlements.
Benefits of Bankruptcy
Bankruptcy offers important benefits over debt settlements for many debtors. Specifically:
Bankruptcy takes care of all of your debts: not just one debt at a time as happens in a debt settlement;
Bankruptcy does not have significant tax implications: Forgiven debt is not considered income by the IRS if you file for bankruptcy but it is considered income if you enter a debt settlement; and
Bankruptcy lawyers are bound by legal and ethical considerations: They will help you achieve a favorable bankruptcy settlement and represent you in legal proceedings. Bankruptcy lawyer fees will be disclosed up front and you will know what you are paying for your lawyer’s legal expertise.
Debt settlement companies, by comparison, often charge outrageous fees that are not properly disclosed to customers. Furthermore, debt settlement companies are not representing clients in legal proceedings and often only complete work that a debtor could do on his or her own.
Talk to an Attorney
Most bankruptcy attorneys also function as "debt relief" experts and are capable of creating a debt settlement plan when it is a better choice than bankruptcy. It always a safer bet to talk to your local bankruptcy attorney before contacting a debt settlement company who's ad you just saw on TV or online.
