Alternatives to Debt Settlement
By LaToya Irby in Bankruptcy
When you’re thinking about settling your debts, you’ll probably also wonder what your other options are. After you evaluate the alternatives to debt settlement, you could decide if debt settlement is truly the best solution for your debt.
Chapter 7 Bankruptcy
A goal of Chapter 7 bankruptcy is to get most, or all, of your unsecured debts discharged. Good candidates for Chapter 7 bankruptcy have low income (less than the median in their state) and few or no assets. If your current monthly income (as defined in chapter 7 of title 11 of the United States Code) is higher than the median income in your state, then you won’t qualify for Chapter 7 bankruptcy. And if you have valuable assets, they’ll probably be seized and sold by the bankruptcy court and the proceeds will be used to pay back your creditors. But, if neither of these cases apply to you, then you could get your unsecured debts discharged in bankruptcy and might only pay the costs of filing bankruptcy and hiring an attorney.
Chapter 7 bankruptcy could stay on your credit report for up to 10 years from the date you filed. If you qualify for Chapter 7 bankruptcy it could be a better option than debt settlement because you’d pay nothing toward your debt.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is often chosen by people whose income is too high to file for Chapter 7 bankruptcy, people who have secured debts, or people with assets they don’t want to lose. Under Chapter 13 bankruptcy, you’d repay all or part of your debt on a 3-5 year repayment plan. After that, the unsecured debt that’s left typically would be discharged.
A Chapter 13 bankruptcy could stay on your credit report for up to ten years. Chapter 13 bankruptcy could be better than debt settlement if you’re using bankruptcy to stop the foreclosure or repossession process on a house or car AND if you can afford to make your loan payments while you’re getting caught up on your past due balance during bankruptcy.
People often can’t choose credit counseling because the minimum payments for a credit counseling program are too high. It’s true that credit counseling can often lower your minimum payments through negotiations with your creditors. However, there may be additional fees for the credit counseling agency that could essentially raise your payment back to what you were paying outside of credit counseling.
It can still be worth it to talk to a credit counselor to see what your minimum payment would be under a debt management plan. If you can afford the payment, it could be better to go with credit counseling than to suffer the credit score damage that would happen with debt settlement.
Debt consolidation often is out of the question for borrowers because they don’t have the credit rating necessary to qualify for a large enough loan or because they don’t have enough available home equity to obtain a large enough loan. Under debt consolidation, you would still need to be able to afford the monthly payment on the debt consolidation loan and keep up with your current obligations.
Before you move ahead with the decision to settle your debts, you should take a close look at all the alternatives to debt settlement.