Debt Settlements Vs Bankruptcy – What’s the Difference Between the Two?
Critics of debt settlement would like you to believe that there is absolutely no difference between a settlement and bankruptcy. There are some similarities between the two. In both cases, your credit score will take a hit and your credit history will indicate that you did not repay your debts in full. However, these similarities are not absolute. The credit score hit by bankruptcy will remain low for very long time.
Law requires the credit history to disclose that bankruptcy was filed by the individual for eight years. On the other hand, you can start the process of improving your credit scorer from the moment you get your debts settled. Further, you can always request your lender not to indicate that you have settled your debts to the credit bureau.
There is a lot more to debt settlement beyond the impact on credit history. Settlement leads to reduction of debt. Bankruptcy does not lead to reduction of debt. Rather, it is discharge of debt where a court appointed official takes charge of your assets and liquidates it to repay all your liabilities in a proportionate manner.
In case of a debt settlement, you negotiate with your lender, either personally or through an agency, and obtain the lenders consent in the form of a written deal. In case of bankruptcy, you simply approach the court and seek protection from your creditors. Your lenders do not have any choice or say in the matter. They have no choice but to accept whatever payment is offered after liquidation of debts.
Did settlement is never absolute. The maximum waiver that you can get from your lender is 70 % – 75 %. On the other hand, bankruptcy does not involve any waiver at all. If money obtained by sale of your assets is sufficient to repay 90 % of your liabilities, then you would have escaped a very small portion of your debt.
The social consequences of debt settlement are insignificant. On the other hand, if you opt for bankruptcy, the entire world will come to know about it. Your future employers, spouse, relatives and friends can search for your bankruptcy details on the World Wide Web. On the other hand, settlement is nothing but a private arrangement between you and your lender.
If you are over $10,000 in unsecured debt it would be wise to utilize a debt relief network instead of going directly to a debt settlement company. Using a debt relief network guarantees that the debt settlement company you choose has been certified and has established success in negotiating settlements. They are free to use and a good starting point to begin your debt relief process.
Debt Relief Network.
Credit Repair After Bankruptcy: 2 Steps You Can Take Now
When you obtain a bankruptcy discharge, your credit will be a disaster. You should, nonetheless, work to repair your credit. It does take time. Nevertheless, you can accomplish it. Whilst there are various unique things you can do to repair your post-bankruptcy credit, this piece emphasizes two easy things you can do today.
1. Call all creditors who continue reporting open, delinquent accounts and give them a photocopy of your bankruptcy discharge.
Each time one of your accounts is sold, the new owner lists it as a delinquent account on your credit report. Even though the original creditor received notice of your bankruptcy, the new account owner didn’t get the notice. The new account owner, therefore, will continue to record the account incorrectly until you make contact with them and present them the correct bankruptcy discharge information. Once you finish this course of action every one of your pre-bankruptcy debts ought to be listed as “closed with bankruptcy” or something similar, instead of open and delinquent.
2. Open a new credit card account.
The current credit reporting system is designed to monitor and report how efficiently you manage your credit. Accordingly, you can’t restore your credit without having some credit. Despite the fact that some people may well encourage you to absolutely steer clear of credit cards following your bankruptcy, you simply can’t do that and expect to rebuild your credit. Plus, if you ever plan to own a home, you’ll need to have a healthier credit score than you’ll acquire coming directly out of bankruptcy and staying away from all forms of credit. Bear in mind, credit scores are about how efficiently you deal with your debt.
Despite the fact that you’ll likely have an incredibly hard time obtaining a regular unsecured credit card, you can apply. You just might stumble upon a creditor willing to offer you a card. However, it will probably come with a dreadfully high application fee, annual membership fee and other assorted fees. Rather than waste your money in that manner (you’ll never get it back), I propose that you get a secured credit card.
With a secured credit card you’ll furnish the creditor a deposit, more often than not $300 or $500. That deposit earns a small amount of interest and is the credit limit for your card. Such cards commonly have no application fee and no annual fees. They also normally report to all three credit bureaus every month.
By getting a secured card, you’re able to make little purchases on a recurring basis and then pay the bill when it comes due every month. By following this practice month after month, you’re establishing a new and improved credit payment history on your credit report.
While there are numerous actions you should take to restore your credit after bankruptcy, these two will have incredibly positive results on your credit score. I suggest you get going on them now.
Late Payments Can Snowball Into Financial Crisis
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What starts as one missed payment can turn into financial ruin if the consumer isn’t careful. Minor money problems can snowball into even more serious issues when nothing changes. This may lead to liens, bankruptcy and other legal actions.
At a glance, one missed payment doesn’t seem like much. However, credit card companies will charge a late payment fee and add extra interest on the amount missed. More recently, creditors have begun increasing the total interest rate charged to delinquent accounts by as much as 10% and increasing the amount of the minimum payment owed every time a payment is late or missed altogether.
For example, a simple monthly payment of $100 can become a $350 monthly payment very rapidly. Most consumers will ration out money in their budget, dividing it among creditors, utilities and basic needs, like food and fuel. Doubling or tripling the amount paid to one bill usually reduces the amount of money left to pay the others, causing a late payment to other creditors. That late payment will result in another fee, added interest and higher monthly payment.
The snowball effect continues until the consumer either catches up or can no longer keep up with mounting fees and bills. Repeated late or missed payments can result in legal action, such as judgments, liens and repossessions.
When the situation turns into a full financial crisis, there are few options. Bankruptcy is one. This is not a simple process, and it must be taken seriously by the debtor. All financial information must be turned over to the person’s attorney and all inquiries from other parties must be answered through the lawyer as well. While the questions asked are complicated and in-depth, full disclosure is always recommended by bankruptcy attorneys. Should creditors or officials from the court or U.S. Trustee’s office believe that information is being withheld or hidden, the process will become even more stringent and invasive.
Although bankruptcy is handled through federal court, each case is processed through the United States Bankruptcy Court (USBC) in the specific district for each state. For example, a consumer in Bronx bankruptcy would be referred to the USBC Eastern District of New York. The debtor would need to find a bankruptcy lawyer in New York to handle the case. Bankruptcy law is very specialized, so legal counsel must be well-versed in bankruptcy laws and procedures.
Filing for bankruptcy has its advantages for those who cannot manage their current financial situation. In most cases, debt is forgiven and the consumer is given a fresh start. They may need to pare down the number of real estate properties and vehicles owned, but will often be allowed to keep at least one of each. A financial payment plan to pay back a portion of debt owed to each creditor may also be required.
Everything You Need to Know About Chapter 7, 11, 12, and 13 Bankruptcy
If you already have exhausted all your efforts on saving your property, still failed meeting your monthly mortgage payments, financial problems continues to persist, then there is no other course to take but to declare bankruptcy.
The Federal Bankruptcy Code, Title 11 of United States Code, discussed bankruptcy details such that it can be understood clearly by struggling borrowers. Objectively, the code supports various financial conditions of debtors. There are 4 bankruptcy filings described under Title 11 bankruptcy code.
Chapter 7 Bankruptcy – Liquidation of Assets
Simply put, this is where individuals and establishments need to sell their assets to pay off debts or part of it, with the exemptions of primary residence and personal belongings as stated by federal and state law. Once a borrower filed bankruptcy under this filing, a trustee or administrator will work on selling his or her assets and pays the creditors from the sale. Usually though, the liquidated assets will not be enough to cover all debts. Some of those obligations will be forgiven or discharged but others known as non-dischargeable debts, such as taxes and student loans, will just have to be carried over in the next filing, which will be in the next seven years.
Chapter 11 Bankruptcy – Reorganization
This form of bankruptcy is most preferred by large corporations and partnerships because of the following reasons:
- Unlimited amount owed.
- Debtors hold in possession of their assets.
- With court supervision, businesses can still operate for the benefit of the creditors. However, if found unproductive, a trustee will take over.
It is in this filing that an appointed creditors committee will be chosen by the U.S. Trustee to look over the ventures of the debtor. In the same committee that debtor will propose an acceptable plan of reorganization which shall take effect depending on their votes. If it gets disapproved, debtor can propose another plan as long as it passes statutory laws.
Chapter 12 Bankruptcy – Adjustment of debts of a family farmer/fisherman with regular annual income
Since their income is dependent on the season, struggling family farmers and fishermen can propose and carry out a plan that is manageable and sustainable to their regular annual income. Compared to Chapter 11 and 13, this bankruptcy law is less complicated, inexpensive and streamlined, made easy for farmers and fishermen to meet.
Chapter 13 Bankruptcy – Adjustment of debts of an individual with regular income
Individuals with monthly steady reliable income with less than $269,250 unsecured debt and no more than $807,750 secured debt are qualified to apply bankruptcy under Chapter 13 without the fear of liquidating their assets. Debtor shall propose a structured repayment plan and the court will either approve or revise. Once approved, the debtor will adhere to all agreements for three to five years.
By comparison, both Chapters 7 and 13 give full debt discharge opportunity that is not applicable in Chapter 11. Generally, individuals prefer to file bankruptcy under Chapters 12 or 13 because firstly, there is no need for liquidation of assets and secondly, debtors will only pay percentage of what was originally owed. Between Chapters 11 and 13, although quite the same by principle, the latter has criteria on the amount of money owed to qualify.
Remember that filing for bankruptcy is voluntary in nature and there are consequences to take. For one, it will definitely ruin your credit record for some time. So the decision must be made after taking everything into consideration. Seeking the help of a financial counselor or a lawyer would be wise in identifying which bankruptcy filing is suitable to your case.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, sometimes called a “straight bankruptcy”, is one of the simpler chapters to file under. In short it is the liquidation of the debtor’s property in order to pay off their outstanding debts. However, there are several alternatives to a chapter 7 which should be looked in to before filing.
Alternatives
Alternatives to a chapter 7 include filing a chapter 13 or a chapter 11 if you own a business and wish to stay in business. A chapter 13 allows you to save your home from foreclosure and to catch up on outstanding debts by making a repayment plan. A chapter 11 bankruptcy is generally for business owners who wish to say in business. This is done by either adjusting the debt that is owed by reducing it or extending the repayment time. The owner may also seek reorganization, which is more comprehensive.
Eligibility
To be eligible to file a chapter 7 bankruptcy your income must be below average for your area. If this is not the case then you must pass a means test to determine whether you are eligible to file a chapter 7, or if you must file a chapter 13 instead. This will be determined when you meet with your attorney to file for bankruptcy. A chapter 7 also does not take care of all debts. Debts that it does not cover include taxes, child support, student loans, fines and restitution, and alimony. Filing a chapter 7 also does not mean you will lose everything.
“Will I Lose Everything?”
A common concern that people have is whether or not they will lose everything. The answer is no, some of your property is exempt from liquidation. These include your car, your home, clothing, and anything else necessary for survival and to earn a living. This comes as a relief to a lot of people worried that they may lose their home and general livelihood due to a bankruptcy. This is one of the many benefits of filing a chapter 7 bankruptcy.
Benefits of Chapter 7
There are many benefits to filing a chapter 7 other than just keeping your house and car. Speed is a big factor when it comes to chapter 7. As opposed to a chapter 13 which can take up to 5 years to complete, a chapter 7 only takes about 5 months. There is also no repayment plan to deal with which means less hassle in the long run. While filing you are also protected from annoying creditors. This means no more phone calls, wage garnishment, repossessions, and foreclosure proceedings. Also you will benefit from an improved credit rating. This may sound weird, but it’s true, most people come out of a bankruptcy with a higher credit rating in the long run. For tips on how to do this see “Your Credit After Bankruptcy”
Cost
In addition to attorney’s fees, a chapter 7 does not cost much. There is a required filing fee of $300 due to the bankruptcy court, and a credit counseling course before and financial management course after filing as required by the new bankruptcy law in 2005. These can cost anywhere from $35 to $50 per course.