All debt relief options are effective and will get consumers out of debt. However, you need to understand that each option requires a certain financial position and attitude to make it successful. Two of the most compared options are debt settlement and bankruptcy. With the emergence of the Chapter 13 addition to this law, the comparison becomes all the more similar.
To give you a bit of background, private consumers who are riddled in debt have two options when declaring themselves bankrupt. The traditional is Chapter 7 wherein most debts are discharged after eligible properties and assets are liquidated. After the crash of the economy, a lot of people took advantage of this and filed for bankruptcy to escape their mounting debts - on top of which are credit card debts. Chapter 13 prevented this abuse from happening. The emergence of the means test separated those who are really unable to pay off their credit obligations from those who earn the state median income and above. In a Chapter 13 filing, the debtor is given a repayment plan that they have to follow. Unlike Chapter 7, properties and assets are protected from liquidation - as long as the debtor can stay true to the repayment plan imposed by the bankruptcy court. Once the plan is over, the debt closed completely.
This repayment plan is a reduced amount based on the calculations of the court. This is exactly what makes it similar to a debt settlement plan. The whole purpose of the latter is to negotiate with the creditors for a lower payment plan for the debtor. The idea is to get into an agreement that the debtor only has to pay for a percentage of the outstanding balance. Once this is accomplished, the debt is forgiven and wiped off.
You can see how the two are similar. However, there are significant differences as well.
For one, the credit damage in Chapter 13 is much more than the other. The taint of bankruptcy will haunt your credit history for 10 years. When you have a successful settlement, a record of a debt "paid by settlement" will stay in your record for 7 years but you can gain credit worthiness in 2 years time.
In bankruptcy, your records will be made available to the public - meaning, people will have access to records stating that you have once filed for bankruptcy. Settling your debts will remain a private matter - apart from the "settled" note in paid off debts of course.
Both of them can give you an average of 30% - 50% repayment/settlement plan but in bankruptcy, this is more guaranteed. In debt settlement, the creditor stays in control of how much the final settlement will be. You do have the option to agree to it or not though. In the other option, once the courts decide, there is nothing you or the creditor can do about it. The amount that you will pay will also be fixed - depending on what the court orders. Settlement monthly payments may vary depending on what you can afford to shell out - at least while you are in the process of building your funds and you are still negotiating with the creditor or collector.
The creditor also cannot take legal action against those in the process of Chapter 13 and neither will they be able to come after the debtor once their debts have been discharged. In debt settlement, the same is true but only if you reach a successful agreement. The creditor has every right to file a lawsuit anytime throughout the process.
Debt settlement costs are double that of bankruptcy because it is a certain percentage of the debt that you enrolled in the program. That is usually $3,000 to $5,000 worth of service fees. It will be higher if you have more debts. In Chapter 13, the average is between $1,500 and $3,000 - depending on what state you filed your petition.
With the recent amendments, the Chapter 13 repayment plan could come out longer since the maximum time frame was extended to 5 years. In debt settlement, the average payment term is usually between 2-4 years.
Both of these debt relief options can effectively get you out of your tight financial situation. The question lies in what sacrifices you are willing to make to achieve financial freedom.
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