After the recent economic recession in the US, many consumers are struggling to pay off their debt. Debt settlement and bankruptcy are two popular debt relief options that people employ to eliminate their financial woes. But it is essential to evaluate the programs before you decide which one will be the right option for your financial situation.
Know the function of debt settlement and bankruptcy:
Both of these programs have different functions because in debt settlement you need to repay less than you originally owed to the creditors. You need to negotiate with the creditors to lower the interest rate on the principal balance that helps to lower the outstanding balance. But you can discharge certain debts completely if you file under chapter 7 Bankruptcy but in chapter 13 bankruptcy you can reduce the payments by stretching over a longer period.
Know about the debt settlement procedure:
Debt settlement is basically a simple process, either you can hire the services of a debt settlement company or directly settle your debts with the creditors. The professional debt arbitrators negotiate with the creditors to lower the interest rate on the principal balance. The creditor and debtor both have to give consent on the settlement offer before the debtor starts repaying. But remember you might not be able to negotiate with the creditors until you have fallen behind on your payments for 2 to 3 months.
Know about the bankruptcy procedure:
Bankruptcy is considered to be a legal process and you have to file a petition with the bankruptcy court. Once you declare bankruptcy then you can avoid harassing collection calls from the creditors. Before you file a petition with the court you have to complete two hours credit counseling session. If you file under chapter 7 bankruptcy it will require six months to complete the entire process. But you will complete your repayment plan under chapter 13 bankruptcy within three or five years.
Expenses involved in these two programs:
When you enroll in a debt settlement program then you should know that you need to pay an upfront fee and the company might also charge a percentage of the amount saved after successful negotiation.
In case of filing bankruptcy you might need to pay a stipulated amount as filing fee. You are required to pay a consultation fee if you hire an attorney to file your petition.
Debt settlement and bankruptcy both can damage your credit report but your credit rating will eventually improve once your start paying off your debts on in future. Remember that you can discharge your debts if you file bankruptcy. Therefore, it will be a feasible option to declare bankruptcy if you are financially strapped and have no other option to pay back your owed amount.
Guest article by Amy Lewis.