Why Filing Bankruptcy is Better Than Debt Settlement.

Friday 5th of October 2012 01:47:25 AM

If you have considered filing for bankruptcy, debt settlement may also be on your radar.  Here is how the two size up in my eyes.  The ads are everywhere, the straight talk is right here.

You may not qualify for bankruptcy, in which case debt settlement may by your only option.   However, if you do qualify for bankruptcy, here are some good reasons why it’s your better choice.

1. Cost:    When you work with a debt settlement company, you will be asked to send them a fixed sum of money on a monthly basis.  The money is pooled into a sizeable sum in the hope that they will be able to negotiate a lump sum payoff of your creditors; one by one.  The premise of the approach is fine; most creditors are more willing to cooperate if you can offer a lump sum settlement.  In practice however, it can get costly.  It could take you months to gather enough money to make any sort of reasonable cash offer that your creditors might accept.  Second, debt settlement companies take a hefty cut of each monthly payment, making it doubly difficult to accumulate enough money to entice a settlement.  If you are able to afford such payments, you can open a separate account for yourself and make the deposits every month without paying a cut to someone else.  Once a deal is made, you will have accumulated enough money to close the deal.

2. Debt Settlement Does Not Stop Collections!  When you are inbankruptcy, creditors cannot continue with ANY collection efforts (no nasty calls, no direct communication with you, no garnishments, levies, repos, foreclosures).  Debt settlement affords no such protection.  I have heard one horror story after the other of debtors hiring debt settlement negotiators only to be served with collections lawsuits in the meantime.  Most debtors are shocked to learn this, so consider yourself warned.  Creditors don’t have to (and usually won’t) stop collection against you just because you are trying to negotiate a settlement.  As long as you are behind on your payments and have not filed for bankruptcy, creditors are free to proceed with collection.

3. Debt settlement does not provide finality:  A bankruptcy can eliminate many debts (especially unsecured debt like credit card debt) once and for all within a matter of months.  Debt settlement plans can take years to complete, oftentimes without a guarantee that the creditor won’t come after you for the full balance.  In fact, most debt settlement plans are set for monthly payments over 2-5 years.  Most plans clearly state that if one payment is late, the creditor has the right to demand  the full original balance.  No such thing takes place in bankruptcy.  Once your bankruptcy is complete, the debt is dealt with and is final.

4. Tax Implications of debt settlement:  As a general rule, debt forgiven is considered taxable income.  If a creditor forgives some of your debt, they are going to issue you a 1099 for the forgiven amount.  You will likely owe taxes on the forgiven debt.  In bankruptcy, you will not be required to pay taxes on debt that is discharged.

5.  Credit Implications:  Let’s face it; if you fall behind on several payments to your creditors, your credit profile is already shot.  At such a point, you have to ask yourself whether worrying about a bankruptcy on your record is worth it.  Compared to the clean, fresh start that bankruptcy can offer you; it usually isn’t worth worrying about.  Which is easier, getting a fresh start and rebuilding your credit, or saddling yourself with settlement arrangements you may not be able to honor?

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Bankruptcy and tax debt: Can I discharge my tax debt in Bankruptcy?

Friday 5th of October 2012 01:46:25 AM

I am often asked this question by clients.  The short answer that most clients will get from their attorney is “No.”  However, this is oversimplifying it.  You CAN get a discharge of tax debt under the right circumstances.

I recently read an expertly written article on this topic.  Here is the link:

Bankruptcy: Can I discharge my tax debt if I file bankruptcy?

Thank You Attorney Coats for your very informative and well written article on the topic.

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“I make too much money to file for bankruptcy.” The Means Test.

Friday 5th of October 2012 01:20:09 AM

How do you know?  Did you look it up online?  Did you ask your neighbor?  Did you ask a friend who has filed before?
The answer lies in a test so complicated that most attorneys cannot even answer the question without inputting almost all of your financial information into an incredibly complex formula known as the ‘means test’.

The means test has some basic major variables, but in truth, it’s so complicated that you need software to figure it out correctly.  If that is the case, how on Earth do you expect to get a reliable answer from friends, family or online?
Sure, there is one element to the test known as the ‘median income’ threshold, but that is only one element.  Yes, if you make less than the median, then the means test may not even apply to you, but you may have expenses that still disqualify you from filing, even with a ‘below median’ income.

Look, there is no reason why you should take an educated guess.  There is no reason why you shouldn’t know for sure.  Finding out is free and only takes a little bit of your time.
You can find out by calling my office and booking an appointment, or filling out some of the basic info on our online questionnaire.  There is no obligation whatsoever.

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