Recently, it seems that just about every American is buried under a mountain of credit card debt. In fact, the average American as of the end of 2011 had $16,000 in credit card debt. Because of this, opportunists have come into the market to give consumers a solution to overwhelming debt. This is referring to the debt settlement industry. Traditionally, when someone was faced with any kind of financial disaster, filing bankruptcy was their only real solution. Now, out of the debt crisis has arisen a new industry called debt settlement and debt consolidation. The idea behind debt settlement is to settle a consumer's debt for a percentage of the balance owed. While it all sounds great on paper, it always doesn't work out for the individual in trouble.
While no one really wants to file for bankruptcy, sometimes it is the best option depending on the circumstances. Debt settlement companies want people to believe that they are a one-stop fix all for debt problems. This industry is unregulated by the federal government and runs like the Wild West. How these companies work is they get the consumer to sign a contract with them to allow them to represent them settling all of their debts. Before they can settle anything, they will need to work up a pile of cash by having the individual pay them monthly payments instead of paying their credit cards. Once they have enough cash together, they will contact the individual's creditors and offer to settle the debt for typically $.50 on the dollar and all of this is done for a fee. This all sounds good except there's a few caveats there.
First of all, once an individual stops making their payments and giving all their money to their debt settlement company, there is a good chance that the creditor might sue the individual. If the creditor can get the individual into court, they will be able to get a judgment against them and garnish their wages. The creditor will no longer need to worry about settling anything because of the judgment. That's why filing bankruptcy is the best. Once an individual enters into a bankruptcy filing, the automatic stay is put in place stopping all collection and illegal activity against the debtor. This means, not only the creditor cannot contact the debtor, but all legal activity also stops including, foreclosure, lawsuits, wage garnishments and judgments.
Other reasons why filing bankruptcy is better than debt settlement include, the tax liability of settling a debt. Sometimes a creditor will send a 1099 to the individual for the deficiency of the debt settled. This will create a taxable situation and possibly cost the person on their taxes. With a bankruptcy filing, all deficiencies and liabilities are completely wiped out. Another good reason to file for bankruptcy is the ability to hire a bankruptcy attorney to fight for you and protect your assets. With debt settlement, you are basically on your own legally.
Filing bankruptcy is not a solution for everybody and should be discussed with a bankruptcy attorney. Debt settlement does have its benefits but usually for only those who have a small amount of unsecured debt. Typically, if someone has over $10,000 in debt, they should consider filing Chapter 7 bankruptcy. In this case, the cost of the debt settlement will be more expensive than the bankruptcy filing.
As for damage to one's credit, they both put a pretty good ding that will last between 7 and 10 years. Usually, after a bankruptcy discharge, credit will be available as creditors know that many people leave a Chapter 7 bankruptcy being virtually debt-free. Both options have their pros and cons and shouldn't be decided on until consulting a bankruptcy attorney.
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