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The weight of debt can grow so great that there is no option but to be rid of it. Perhaps repayments have become simply too much to handle, but the reality of the situation dictates there is no chance of repaying what is owed. But what is the best course of action - bankruptcy or debt settlement?
Lifting the pressure created by large debt is welcome, but there is no doubt that honest borrowers would rather repay their debts in full. There can be a certain fear that the consequences of bankruptcy will be more damaging that the immediate benefits, but it may also seem that the impact of debt settlement is more immediately damaging. So which is the best one to choose?
The Bankruptcy Option
Most people are well aware of bankruptcy as a way to escape an impossible debt. When choosing whether bankruptcy or debt settlement is the best course of action, there seems to be no contest on the basis that bankruptcy involves debts been written off completely. However, times have changed.
When the economic crisis hit a few years ago, tens of thousands of people filed for bankruptcy under Chapter 7 of the Bankruptcy Code. This was because the consequences of bankruptcy were considered better than continuing under the pressure of repaying the debts in full. But for US lawmakers, people seemed to be taking advantage of the system.
Now Chapter 13 exists, which provides for a means test to decide on the ability of an applicant to repay debts. If the applicant is found to be financially incapable, then full bankruptcy is granted, but if there is some capacity, then a small percentage of the debt will have to be repaid. It may seem like debt settlement, but the consequence is the same as bankruptcy, and the impact of debt settlement less severe.
The Debt Settlement Option
Whether filing for bankruptcy or debt settlement, the outcome is the same: the troublesome debt is gone for good. However, not everyone can qualify for bankruptcy. In this case debt settlement is the best option, but there are clear measures that need to be taken to ensure it proves an effective option.
Debt settlement involves negotiating an agreement with a creditor to pay a percentage of an existing debt, with the balance written off. It could be 25 cents in the dollar is paid, or perhaps 65 cents, but whatever the figure, the agreed sum must be cleared. Whereas the consequences of bankruptcy can see financing ruled out for perhaps 2 years, settlement is less punishing.
Chiefly, the impact of debt settlement is simply to have a share of the debt paid, and this is seen as constructive rather than a complete abandonment of the debt. So, lenders are more open to granting loans in the future (though these are still under very strict terms)
Choosing Between The Two
Bankruptcy or debt settlement, which is the best option? Well, this comes down to your own particular situation. For a start, not everyone who files for bankruptcy will get it, so it is a case of knowing your available options rather than your preference.
To assess your eligibility for bankruptcy, calculate your average monthly income over the last 6 months. If it is less than the average income in your state, then there is a good chance of filling successfully. Remember too that bankruptcy costs are between $1,500 and $3,000, but the consequences of bankruptcy can make the investment worthwhile, of course.
The impact of debt settlement is far greater on your pocket. It involves weighing up total monthly expenditure against income to find out your excess income. Then calculating what repayments are affordable and presenting that as a percentage of the required repayment. The sum and terms must be confirmed in writing and signed to ensure no future legal issues.