Think of it as a debt management conundrum - should you file for bankruptcy or try to strike a settlement agreement with your creditors? Depending on your situation, either one can be a viable route if you can no longer make payments on a loan or credit card. But it's important to carefully analyze both courses of action, not only in terms of cost, but impact on your credit score. Here's a closer look at both debt settlement and bankruptcy:
Generally speaking, filing for bankruptcy - whether it's Chapter 7, 11 or 13 - negatively impacts your credit score for longer than a settlement would. A Chapter 7 bankruptcy, for instance, would remain on your credit report and be reflected in your credit score for up to 10 years. A Chapter 13 bankruptcy, for seven years. But the big thing about bankruptcy is that there's really nothing you can do to repair credit after you've filed - you just have to endure until the bankruptcy is removed from your credit report after seven to 10 years. A Chapter 13 bankruptcy could be very benefitial for a business, however it is not advised for regular consumer debt. When factoring the amount you will end up paying when you include attorney's costs and other fees, it simply is not worth it.
Debt settlements typically require you to work with the creditor to see what they'd be willing to accept to settle an outstanding balance. While in many cases, they'll accept less than what you actually owe, there are a few things to consider when it comes to settlement:
You'll likely have to make a lump sum payment.
Your credit may still be damaged if you've failed to make on-time payments. Therefore, you'll still have to enact a credit repair strategy to raise your score following settlement. (Credit tip: If a payment goes to collections, it isn't removed from your credit history until it's reached seven years from the time of last delinquency. So if you just now settle a debt you stopped making payments on 4 years ago, you'll only have 3 more years before it's wiped off your report.)
The IRS considers forgiven debt as taxable income, which means that federal debt collectors might be coming after you for more money if you don't file your income taxes properly.So if you're caught in a financial pickle, be sure to do your homework before you settle or file for bankruptcy and what it may mean for your credit future.
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