October 23, 2014

Negotiating Debt Settlement vs. Filing For Bankruptcy

If you’re struggling with debt and looking for a way out, bankruptcy is not your only option.  In fact, there are several legal alternatives that can help you eliminate your debt.  One such option is debt settlement negotiation, which allows you to get out of debt by paying only a fraction of what you owe creditors, typically less than half of your outstanding balance the creditor is claiming.

The best way to determine if you are a good candidate for debt settlement is to speak with an experienced debt settlement attorney who will review your financials and make a recommendation based on their analysis.  In the meantime, however, here are some things to think about:

You may make too much money to qualify for Chapter 7 bankruptcy. The idea that you make “too much money” may seem preposterous, but you’d be surprised. Some people who are drowning in debt with little or no savings do not qualify for Chapter 7 bankruptcy because they make too much money “on paper.” To determine if you qualify for Chapter 7 bankruptcy alternative, you’ll need to calculate your average monthly income for the past 6 months. Income includes not only the income on your paycheck, but any savings, rental income, alimony/child support, investment returns, etc. If your average monthly income exceeds that of your state’s median income, you likely make too much money to file Chapter 7.

Bankruptcy may not eliminate all of your debt. Some debt, such as federally backed student loans, child support and debts owed to the IRS are not dischargeable through bankruptcy.

Filing bankruptcy has serious long-term consequences. The amount that your credit score drops after filing bankruptcy depends in large part on the amount of negative comments that appear on your credit report. Generally speaking, however, filing bankruptcy drops credit scores 200-250 points. What’s more, bankruptcy stays on your credit report for the next 7-10 years. In the first few years after filing bankruptcy, many people find that they have trouble renting an apartment. Even qualifying for a gym membership can be difficult in the very beginning. Finally, filing chapter 7 may require that you sell your home and/or car.

Take a look at how debt settlement compares:

  • You won’t be penalized for making too much money with debt settlement. On the contrary, in order to make debt settlement work, you’ll need to have a job or other reliable source of income.
  • Debt settlement may not be able to settle debts that are not dischargeable through bankruptcy. However, because debt settlement can reduce the overall debt you owe elsewhere, it can make paying off these debts more manageable. Moreover, certain types of student loans may be negotiated and settled at a reduced rate. It depends on the facts and circumstances of the loan.
  • Debt settlement paves the way to improving your credit score. To be sure, any time you do not pay your debts as agreed, your credit score could be affected. Depending on how many payments you’ve missed and what negative comments appear on your credit report, “stop” payments drop your credit score by about 50 points (as opposed to 200-250 points with bankruptcy). In any event, many people find they’re able to qualify for a department store or gas card immediately after debt settlement. Moreover, because length of credit history is an important factor in getting a good credit score, keeping old credit accounts open can help you survive debt settlement with minimal credit consequences.

This article is not intended to confer specific legal advice but rather to provide general legal information.  If you would like to speak with an Arizona licensed attorney on the issue, the attorneys at McCarthy Law are experienced in this area of the law and are available for consultation.  Contact our Phoenix, Arizona area office today to set up your free consultation.

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