Home > Research Legal Advice > Bankruptcy / Debt > Debt Settlement vs Bankruptcy I do not want to file bankruptcy, however...
Asked 11 months ago - Overland Park, KS
Flag$13k - $15K credit card debt, one turned over to collections, one still with company until end of the week. Need to do something soon, don't know what to do.
For a good portion of our clients who file a Chapter 7 and who have bad credit going into a bankruptcy, the credit reports we run generally estimate a 12-month IMPROVEMENT in credit scores. A bankruptcy would only leave you off notably worse if you had an absolutely perfect credit score, which with 13-15K dollars in debt, you don't. If you are doing a Ch 7, 3-4 months after you file and get your discharge you will be getting credit card offers which will allow you to start rebuilding your credit.
There are a lot of advantages to bankruptcy vs. debt consolidation. One is that bankruptcy is mandatory for creditors to participate in, debt consolidation is not. Bankruptcy stops all pending litigation against you, debt consolidation does not. If a creditor drops the amount you have to pay, the IRS could consider that income for that year and tax you on it. Forgiven debt in a bankruptcy and is not taxable income. Bankruptcy is supervised by a Federal court, a lot of debt consolidation outfits are shady operations. Bankruptcy can be a much better option than debt consolidation.
Talk to a local bankruptcy attorney and give them all of the facts, they can truly help you get a handle on whether or not filing bankruptcy is in your best interest.
Generally, debt settlement will hurt your credit as much or more than a bankruptcy. For you to settle debts for less than you owe you will need to let the credit cards go behind. This destroys your credit score. Further, a creditor can sue on the debts owed and don't have to agree to settlement. In bankruptcy you discharge the debts and while it will hurt your credit it will not hurt it forever. There are also tax implications to debt settlement. Speak with a bankruptcy attorney who will go through both options. If you do do debt settlement look up the company's reputation on the internet and many have significant complaints and bad reputations. The FTC recently cracked down on debt settlement companies because they promise the world and deliver little or nothing.
As a rule of thumb, once you have collections and are trying to "settle" debt, your credit worthiness cannot get worse and certainly bankruptcy is the quickest way to turn things around because after the discharge, you can get extensions of credit and begin rebuilding your credit. Without bankruptcy, nobody is going to lend you credit anytime soon.
Please don't use a debt settlement company. Consult the Kansas Office of the Banking Commissioner and the AG. They will tell you how those companies have wreaked havoc in the lives of Kansas consumers. Try to settle the debts yourself or simply meet with a bankruptcy attorney just to hear your options. Many bk attorneys give free initial consultations with no further obligation.
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