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Comparing Debt Settlement Services Vs Bankruptcy
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If you're overwhelmed by debt and searching for a way out, you've probably whittled down your options to debt settlement services or bankruptcy. Both offer advantages and disadvantages, but you'll need to figure out which is best for your unique situation.
The best place to start is ordering free copies of your credit report from AnnualCreditReport.com. Create two lists: one of your debts and the monthly minimum payments necessary and a list of your total net income.
If you have more income than debt every month, turning to debt settlement companies may be a better option than bankruptcy, as a settlement plan will require a large lump sum payment to make your payments to creditors. If you have more debt than income, you will find it nearly impossible to save up the money to settle your accounts, and bankruptcy may be your best option. Depending on your financial situation, you may qualify for Chapter 7 bankruptcy, which will wipe out all of your debts, except for taxes, child support and student loans.
The Impact on Your Credit
Another important consideration is the impact to your credit. Turning to debt settlement companies or debt settlement lawyers will cause a drop in your credit score by at least 50 points, or much more if you've been late on payments. Considering most debt settlement services require you to stop paying on all of your accounts to build up a lump payment and gain leverage, the damage can be much higher. It's also important to remember that many creditors today see debt settlement as the same as bankruptcy, so it may be just as damaging.
Bankruptcy, on the other hand, will immediately cause a drop in your credit score by up to 200 points, although it may actually help if your credit is already bad. Many people with credit scores in the 500's find their credit rating actually improves after filing, for example. Bankruptcy will remain on your credit report for seven to ten years, and it may make it difficult to buy a house or car or qualify for new credit for years.
The Cost of Debt Settlement Services vs Bankruptcy
You'll also want to consider the actual cost of each before making your choice. If you choose to work with a company, you will either need to pay a percentage of your total debt before settling or a percentage of the successfully settled debt. You'll also need to pay a lump sum payment to begin your plan, which may be hundreds of dollars. The money you pay the debt settlement companies actually goes toward fees for up to 1 year, with a small amount set aside each month to eventually offer your creditors. There's no way to determine how much you'll end up paying, or if the company can even succeed in settling any debts for lower amounts.
You may want to assume a figure of 65%, meaning you will need to pay 65% of your total debt over the course of 3-5 years, plus the fees the company will charge. You will also probably be responsible for paying taxes on the forgiven debt, which the IRS considers income. Depending on your tax bracket, this could be about 20% of the amount that is forgiven.
If you choose to file bankruptcy, you may end up paying just attorney's fees and the filing fees. If you qualify for Chapter 7 bankruptcy, you will not need to pay back any of the qualifying debt, which will be wiped out forever. You may be able to file and pay attorney's fees with a cost under $600.
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