You may be struggling with your debt, wading through a sea of information and misinformation online regarding possible solutions. Most quests for knowledge start with a question posed to Google. “Should I hire a bankruptcy attorney or hire a debt settlement company?”  On the radio, you may have heard the tantalizing advertisements where a debt settlement company promises to get you out of debt without filing for bankruptcy.

Pay 50% of your debt. Be debt free fast. The debt settlement ad usually also mentions a key fear of anyone struggling with debt, if you file for bankruptcy you will lose your house, car, and other personal possessions.

First, in well over 90% of Chapter 7 bankruptcy cases, the person who discharges their debt retains all of their property. However, I have seen situations where a person liquidates a retirement account to settle debt only to later find out that their retirement would have been 100% protected in a bankruptcy in Nebraska. The other downer was that the liquidated retirement money only went to paying for a debt settlement company’s fees and not towards any of the person’s debt.

Second, many people struggling with debt are not in the position to pay on any of their debt let alone settle it for 50%. When your income is just enough to cover basic living expenses (housing, food, clothing, transportation, etc.), a bankruptcy that discharges your debts makes the most sense. Hiring a debt settlement company almost always delays the inevitable.

Third, a bankruptcy is the faster and more efficient solution. The Chapter 7 bankruptcy can take only 3-4 months and it handles all of your debt at one time (with some exceptions like student loans and some tax debts). A debt settlement company may not be able to settle your debts for 2-3 years. Additionally, many creditors require you to default and be in default for quite some time before being open to settling. While they wait, interest, penalties, and even attorney’s fees accrue.

Fourth, the cost of filing a Chapter 7 bankruptcy is extremely affordable as compared to a debt settlement company’s fees. The general cost of a consumer Chapter 7 case can range from $1,500 to $2,500. A debt settlement company charges a percentage of the cancelled debt. Additionally, you may be at risk of paying taxes on the cancelled portion of the debt.

For example: You had $10,000 worth of credit card debt. By the time the debt settlement company settles the debt, you owe $15,000 because of the accruing interest, penalties, and attorney’s fees. After liquidating a retirement account, you pay $7,500 to the creditor as a part of the settlement. You pay 20% of the cancelled amount ($7,500), which is $1,500, to the debt settlement company for its fee. The total you paid was $9,000, which is only $1,000 less than the original principal balance. On top of that, you receive a 1099-C at tax time and may owe taxes on the cancelled portion of the debt. Overall you may end up paying back 100% or more of the original debt.

If you filed a Chapter 7 bankruptcy instead, you would have paid $1,500 to an experienced bankruptcy attorney. You would have kept your $7,500 retirement account. You would have eliminated your legal obligation to pay the $10,000 debt and would suffer no potential income tax consequences come tax time. In effect, you saved $8,500 and achieved the same end result.

When figuring out how to handle your debt, it can be overwhelming. Meeting with an experienced debt resolution attorney who can comprehensively provide you with your bankruptcy and non-bankruptcy options is a good place to start.

Patrick Patino

CategoryMoney Matters