Debt Settlement Versus Bankruptcy: Pros And Cons
When you are struggling with debt and you are exploring your options, you may be considering personal bankruptcy or debt settlement. Both bankruptcy and debt settlement are ways of reducing, eradicating, or managing debt. Yet there are pros and cons to each, and it is important to understand the benefits and limitations before you move forward with a decision. Most importantly, you should have a lawyer examine your circumstances and provide you with detailed information about debt settlement and bankruptcy, and advise you about the consequences of both approaches to dealing with debt. Our West Palm Beach bankruptcy attorneys can evaluate your circumstances today, but in the meantime, the following are some of the major pros and cons to consider when it comes to debt settlement versus bankruptcy.
Your Credit Score
If you are particularly concerned about your credit score and your ability to be eligible for credit in the very near future, it is different for each person whether bankruptcy will impact your score worse than debt settlement. If you file for bankruptcy, you will need to wait for a period of time before seeking certain forms of credit again, such as a mortgage. Your credit score will take a hit with debt settlement and bankruptcy and there is no guarantor you will qualify for certain loans if your debt is large or you have past due payments, even if you avoid filing.
At the same time, however, your credit will likely not experience the kind of hit that you are worried about if you file bankruptcy. Relatively soon after a bankruptcy discharge, you can be eligible for lines of credit again. Within a couple of years in some circumstances, you can be eligible for a mortgage again, as well. However, if you are hoping to buy a home in the coming year, bankruptcy might not be the right choice for you.
Forgiven Money Owed Through Debt Settlement is Taxable, While Debt Discharged in Bankruptcy Is Not Taxable
Debt settlement usually results in the creditor accepting a smaller amount of money from you to resolve your debt based on their agreement to forgive the remaining amount of debt. Differently, in a bankruptcy case, you can be eligible to have certain debts discharged, or wiped out. You should know that these distinctions can have a significant effect on your taxes.
Any debt that is forgiven by a creditor or debt collector as part of a debt settlement agreement will be taxable as canceled debt. To be clear, you will need to pay taxes on the amount of debt forgiven, as if that forgiven amount was income. Differently, debt that is discharged in a bankruptcy case will not be taxed.
Debt Settlement Reduces the Amount You Owe While Bankruptcy Can Eliminate It
With debt settlement, your debt will ultimately be eliminated, but only through a reduction in the amount of money you owe. You will negotiate with the creditor to pay a certain amount so that remaining debt can be canceled. With a Chapter 7 bankruptcy, you can discharge all eligible debts.
Contact a Bankruptcy Lawyer in West Palm Beach
If you need assistance determining whether to seek a debt settlement agreement or to file for bankruptcy, a West Palm Beach bankruptcy attorney at Kelley Kaplan & Eller can assist you.
Sources:
thebalance.com/debt-settlement-vs-bankruptcy-5179985
irs.gov/taxtopics/tc431
