Debt Settlement vs Bankruptcy • Video

What is the disadvantage of debt settlement vs bankruptcy? We all hear about settling taxes and debts on radio and TV instead of filing a Chapter 7 or 13 bankruptcy. But many Debtors find out a year or more later after paying debt settlement companies they were scammed and wasted time and money. So how does a Chapter 7 or Chapter 13 bankruptcy compare to debt settlement?

Comparing Debt Settlement vs Bankruptcy

To begin, the debt settlement companies ask you to pay them instead of credit cards. After paying the debt settlement company a significant amount of money debt settlement companies attempt to settle these debts. However, Debt Settlement companies have little or no power to force credit card companies to accept any offer. As a result, most debt settlement companies rarely settle for 50% or less. Conversely, Bankruptcy court judges often issue federal court orders and order credit card and other creditors to accept 10% or less. Almost all Chapter 7 cases pay 0%.  If I had to estimate the average Chapter 13 I would say it probably repays about 30% to the unsecured creditors depending on the district. Plus, most people complete a Chapter 7 bankruptcy over 99% of the time within 4 months. People take years and rarely successfully complete debt settlements.

⎆ What you are not told about debt settlement companies.

Debt settlement companies often file bankruptcy themselves taking your money with them. As an example, see how Ameridebt took the money and then filed bankruptcy. The fact is, most people are never able to complete these debt settlement plans and eventually file bankruptcy anyway. An overwhelming number of people who sign up with debt settlement companies eventually file a Chapter 7 or 13 bankruptcy.

If you are unable to complete Chapter 13 you might be able to convert to Chapter 7 or obtain an early discharge. On the other hand, if you don’t complete debt settlement you lose the money paid but you still owe the debts. In fact, you might even end up owing more than your original debt. What debt settlement companies do not tell you is that you can negotiate directly with credit card companies.

⎆ Damage to your credit rating is less with bankruptcy.

The damage to a credit rating is about the same or less with Bankruptcy as a debt settlement. Either way, debts remain repaid. At the end of a bankruptcy, creditors report debt as account closed. That language makes it sound more like it was paid. Debt settlement normally reports the account as being charged-off or unpaid.

⎆ Some debt settlement companies are frauds.

In one fraudulent scheme, a debt settlement company instructed a debtor to transfer all of his legal property to them to avoid the claims of creditors. They did this by claiming that these legal documents would keep creditors from successfully suing him. Then, they sold his assets.

⎆ Debt settlement vs bankruptcy and taxable income.

In debt settlement, any debt that is settled is treated by the IRS as income for tax purposes. The lender issues a 1099-c for earned income. That means that if a credit card company forgives $30,000 worth of your debt, you pay income taxes on $30,000 as if you earned $30,000. Conversely, bankruptcy does not treat discharging the debt as income. If a creditor issues a 1099-C, the tax code exempts debts discharged in bankruptcy from income taxation.

Debt settlement offers very little benefit but a Chapter 7 or 13 bankruptcy eliminates debt with no tax consequences.

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Louisville Kentucky Bankruptcy Forms

Free Kentucky Foreclosure Manual - Nick C. Thompson, Louisville, Kentucky Bankruptcy Attorney Other Related Information

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If you are thinking about filing bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.

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