Bankruptcy v. Settlements

Before entering into any settlements with creditors, you should consider whether bankruptcy is a better course of action. The notion of settling for a percentage of the debt sounds enticing but take a close look at the actual numbers as well as the overall consequences.

• Outstanding balances may be inflated by interests, late fees and attorney fees: when it comes to consumer credit debt, the average interest rate after default is 29% to 30%. As such, the debt will grow exponentially and easily double or triple in size.
  • So are you really settling for 40% or 50% of the balance of the debt? Most likely not.
  • In a Chapter 7 Bankruptcy, you may pay nothing or a small fraction of the total debt.
  • In a Chapter 13 Bankruptcy, you would pay a percentage of the debt back over a period of 3 to 5 years. Yet this percentage is generally based directly on what you are actually able to pay per month.
• Be aware of Taxes triggered by Forgiveness of Indebtedness: in considering the benefits of settlements, take under consideration the potential tax consequences. You may have to declare as income the portion of the debt forgiven on your federal income tax return. Depending on your tax bracket and circumstances, you may have to pay additional taxes based on the amount of debt forgiven in the settlement.
  • The filing of Bankruptcy does not trigger the forgiveness of indebtedness issue. Therefore, you will not have to pay federal income taxes on debt discharged in your Bankruptcy case.
• Settlement and credit reporting: if you reach a settlement, the creditor has the right to report on your credit report that the debt was satisfied pursuant to a settlement and for less than what was owed. For credit purposes, this will be construed in a detrimental manner against you and affect your ability to obtain credit.
• Lawsuit and credit reporting: even if you settle the case, the credit reporting agencies will disclose the existence of the case as it is part of the public records. Consequently, your credit score will be adversely impacted and your ability to obtain credit will be impaired.

BANKRUPTCY

Bankruptcy is a comprehensive solution and it will address all of your outstanding credit card, collection and medical bills. You will not have to deal with each creditor individually to set up payment plans or settlements.

If you file for Bankruptcy, you will not have to declare as income on your federal tax return any debts eliminated in the case.

Bankruptcy will also stop all collection efforts, irrespective of the stage. Creditors will not be able to contact you by phone or in writing. Creditors will not be able to file or continue lawsuits, foreclosures, garnishing wages, seizing funds from your bank account or seizing any assets.

To determine whether Bankruptcy is the best alternative, call us to set up an appointment for a free consultation. You will speak to one of our attorneys who will analyze your set of facts and guide you accordingly. Our office focuses in consumer bankruptcy and our goal is to assist you in your path towards financial stability.

Please contact us for your FREE consultation at (954) 255-2022 or complete our online form. We offer late appointments on weekdays and we are open on Saturdays to better serve you.