When you are under enormous pressure to pay off debts that you are unable to service, you have two options – to choose bankruptcy or to go in for debt settlement. Each has its pros and cons and will be suitable in different financial circumstances. Both impact your credit rating negatively, though to varying degrees.
Debt Settlement
In a debt settlement, the lender agrees to forgive part of the debts in return for a payment of the rest of the amount. The discharge receipt, however, says that the payment was made in full. Usually, people consider this option before opting for bankruptcy as the credit rating is not affected very negatively. A professional debt negotiator or a lawyer is the best person to negotiate the debts on your behalf. Typically, a debt negotiating company consolidates all the debt and ensures that you have to pay only one check each month toward debt settlement. In a debt settlement, debts are normally wiped out within 3 years.
To qualify for a debt settlement your income should be greater than your expenses. Only then will you be able to make the monthly payments toward repaying the debts you have incurred. When calculating your income, be sure to include your wages, interest income, rental income, and so on. Similarly, make sure that you have listed all your expenses, before you commit to a debt settlement plan.
Bankruptcy
When a debtor declares bankruptcy, and the court accedes to this request, all the debtor’s debts are forgiven. The creditors are paid only from the sale of the non-exempt assets of the debtor. As the debts are not repaid in full, there is a negative impact on the credit rating. In fact, this effect on the credit rating can last up to 10 years. Such a negative rating will make future borrowing more expensive. This is because the creditor is taking a greater risk in lending to you.
You need to check your finances properly before you decide to file for bankruptcy. You should file for bankruptcy only if your expenses are greater than your income. Also, your non-exempt assets should be worth less your total debt. Filing for bankruptcy itself costs money. However, after factoring in these costs, if you still feel that it is a financially sound decision, then only should you file for bankruptcy.
Consult a Lawyer
Before you decide between debt settlement and bankruptcy, consult a lawyer who will guide you about the options available to you. Also, a lawyer will be a better negotiator with your creditors in the event that you opt for debt settlement. Additionally, you need the services of a lawyer if you decide to file for bankruptcy.
