Bankruptcy can do a lot to help you get rid of debt, depending on the type of debt you face and the situation you are in. While bankruptcy can sometimes seem like an easy answer, the reality is, it can ruin your credit and it may not even really help you to eliminate all of your debts. As such, in certain cases, it makes a lot of sense to try to avoid bankruptcy and do debt settlement instead.
Understanding Debt Settlement and Bankruptcy
Debt settlement is a process wherein you make an offer to a creditor to pay less than the total amount you actually owe, and the creditor agrees. It is sort of like a "short-sale" for debt. For example, you may have a $4,000 balance on your credit card. You can offer to pay the creditor $3000 and he may agree to accept that and call it even. This probably won't reflect too favorably on your credit- the debt will probably show up as settled- and you may have to agree to make a one time lump sum payment instead of monthly payments, but if it can save you from bankruptcy, then it may be a great option.
So, when should you try to avoid bankruptcy with debt settlement? Really, the answer is, any time you can. You need to consider:
- Can you actually make a payment or payments to settle your debt
- Will your creditors agree
- How much is it going to cost you.
If you can come to an arrangement with your creditors and you have the money, avoiding bankruptcy is a good idea. This is especially true if:
- You don't qualify for a chapter 7 bankruptcy. With a Chapter 13 bankruptcy, you have to pay back some of your debt anyway under a payment plan. If you can achieve the same type of deal or plan with your creditors without the bankruptcy, why get that black mark on your record.
- Your debt is student loan debt or tax debt. These two kinds of debt aren't dischargeable in bankruptcy. If your lender is willing to settle or the IRS accepts an offer in compromise, take it since your bankruptcy won't do anything to help you out in those areas.
Getting Help
Ultimately, the best way to decide whether to avoid bankruptcy or whether to file is to talk to a bankruptcy attorney. The attorney can give you specific details on exactly what debts you could wipe our during bankruptcy and on whether you are better off getting rid of the debt and starting over or whether you would be better off finding some way to pay and settle that debt.
