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Bankruptcy vs. Debt Settlement: Which Is The Best Option For Me?

If you’re dealing with a mountain of debt, your options are to either visit bankruptcy law firms in Mesa and have them help you file for bankruptcy or visit credit counseling agencies and have them negotiate a debt settlement deal for you.
However, before you make any of these visits, you have to decide which of the two options of getting out of debt is best for you. These two options have their pros and cons, and settling for one or the other can be quite challenging. Therefore, before you settle for one, you must understand the pros and cons of bankruptcy and debt settlement.
What Is Bankruptcy?
Bankruptcy is a legal option available to debtors to request the court to either completely dismiss their obligation to pay the debt they owe under Chapter 7 bankruptcy or develop a payment plan to allow one final payment to the creditor under Chapter 13 bankruptcy.
What Is Debt Settlement?
Debt settlement is an agreement between debtors and creditors where the creditor accepts to take a portion of the total amount owed by the debtor, as long as the debtor promises the creditor a substantial lump-sum payment.

When Should You Consider Bankruptcy Or Debt Settlement

You will know that you have a debt problem when your monthly payments to cover your debt obligations amounts to more than 20% of your income. However, before you decide whether to consider bankruptcy or debt settlement, you should be aware of the scenarios that will help you choose the best option for you.

Scenarios where bankruptcy is the best option for you to get you out of debt:

If your future attempts to get out of debt will likely take you more than five years.
You have no income source and therefore can’t settle your debt.
You have failed to plan out a debt relief program, and now bankruptcy is your last option.
If you’ll be required to tap into your pension or emergency funds like your Individual Retirement Account (IRA) or 401k account to make your debt payments.
If your home is at risk of foreclosure, Chapter 13 bankruptcy can help arrange for one final debt payment.
If taking out payday loans with high interest rates is the only option to meet your debt obligation.

Scenarios where debt settlement is the best option for you to get you out of debt:

You want to negotiate with your creditors for a settlement plan that you can afford and abide by.
Your income is substantial enough to cover your debt settlement payments and your monthly household bills.
Your creditor is willing to accept a lump-sum payment in exchange for reducing your debt burden.
You should note that the above are just general guidelines for you to follow. For a more detailed analysis of your financial situation, visit a bankruptcy lawyer or a credit counselor.

Pros And Cons Of Bankruptcy and Debt Settlement

Now that you have an idea about which option suits your situation, the next step is to look at the pros and cons of bankruptcy and debt settlement. As we have mentioned, these options entirely depend on your situation, and what might work for you might not for another individual.

Pros and Cons of Bankruptcy

As mentioned earlier, two kinds of bankruptcy laws oversee how the law should be applied when dealing with bankruptcy. The first is Chapter 7 bankruptcy which allows the court to eliminate your debts. However, in some states like Arizona, it enables your debtor to sell your non-exempt assets to recover a portion of your debt. Chapter 13 bankruptcy helps protect your house from foreclosure. However, you will be required to pay a certain percentage of your debt within 3 to 5 years.
Pros of Chapter 7 Bankruptcy:
The pros of Chapter 7 bankruptcy include the opportunity to have a financial restart since the majority of your debt will be cleared. You can also file for bankruptcy and have it approved within 6 – 8 months. Once the court approves your bankruptcy, you’ll not be required to pay any taxes on the debt you owe. Finally, you will not have to worry about being harassed by creditors looking for payments.
Cons of Chapter 7 Bankruptcy:
One major con is the fact that in Arizona, your non-exempt assets such as your home can be seized and auctioned off by your creditors. Secondly, the damage a chapter 7 bankruptcy will do to your credit score will last for ten years.
Pros of Chapter 13 Bankruptcy:
Once your bankruptcy filing under Chapter 13 is approved, your debt will be discharged once you complete paying the court-mandated debt payment. Secondly, your assets won’t be seized to cover your debt since they are protected. Thirdly, you’ll not be required to pay any taxes on the unpaid debt.
Con of Chapter 13 Bankruptcy
The cons associated with Chapter 13 bankruptcy include your credit score taking a major hit, making it impossible for you to access loans and credit. Secondly, the court will order you to pay a certain portion of your debt in 3 to 5 years.

Pros and Cons of Debt Settlement

Setting a debt settlement plan is a great way to get out of debt if you don’t want your credit rating to take a hit. However, the potential consequences are also immense.
Pros of Debt Settlement
Once you agree to settle your debt, you’ll only have to pay a portion of your debt. Secondly, after you settle your debt obligation, your financial records will not become public records. Finally, you can ask a credit counselor to help you negotiate a debt settlement plan with your creditor that will help you avoid bankruptcy.
Cons of Debt Settlement
After making the decision to settle your debt, you might encounter several challenges. Your creditor might refuse to negotiate with you. If you decide to stop paying your debt to convince your creditor that your ability to pay the debt is inhibited, your creditor could take legal action against you.
Some creditors might refuse to engage with the debt settlement company you hired to help you negotiate due to the exorbitant fees these companies charge. Furthermore, after settling your debt, the IRS will require you to pay taxes on your forgiven debt as it will now be considered regular income. Your ability to ask for credit or a loan credit score will be impacted as well because of poor credit scores. Finally, if you cannot settle your debt according to the agreed settlement plan, you will be left with an even larger debt.
At this point, you probably have an idea of which option you’d like to take to get out of debt. However, if you still need more information and advice, you can contact a credit counselor or visit https://azbankruptcysolutions.com/mesa to get in touch with bankruptcy attorneys.

Arizona Bankruptcy and Debt Solutions
1013 S Stapley Dr
Mesa AZ 85204

Do You Qualify for Bankruptcy?

Filing for bankruptcy isn’t the right solution for everyone. The determination of whether or not bankruptcy is an appropriate debt relief solution for your will be made based on a number of factors including the type and total level of your debt. Use this form to schedule an appointment with one of our bankruptcy attorneys. The consultation is completely free and there is no obligation.