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Debt Settlement vs Bankruptcy: Which is Best?

You’ve tried debt payoff strategies, balance transfers, consolidation, and even debt management; you’ve begged your creditors, liquidated your assets, and pestered your friends and families for any money they can afford, but after all of that, you still have more debt than you can handle.

Now what?

Once you reach the end of your rope, the options that remain are not as forgiving as debt management and they’ll do much more damage to your credit score than debt payoff strategies. However, if you’ve tried other forms of debt relief and nothing seems to work, all that remains is to consider debt settlement and bankruptcy.

Debt settlement is a very good way to clear your debt. It’s one of the cheapest and most complete ways to eradicate credit card debt and can help with most other forms of unsecured debt as well. Bankruptcy, on the other hand, is a last resort option for debtors who can’t meet those monthly payments and have exhausted all other possibilities.

But which option is right for you, should you be looking for a debt settlement company or a bankruptcy attorney?

Similarities Between Bankruptcy and Debt Settlement

Firstly, let’s look at the similarities between bankruptcy and debt settlement, which are actually few and far between. In fact, beyond the fact that they are both debt relief options that can clear your debt, there are very few similarities, with the main one being that they both impact your credit score quite heavily.

A bankruptcy can stay on your credit report for up to 10 years and do a lot of damage when it is applied. It may take several years before you can successfully apply for loans and high credit lines again, and it will continue to impact your score for years to come.

Debt settlement is not quite as destructive, but it can reduce your credit score in a similar way and last for up to 7 years. Accounts do not disappear in the same way as when you pay them in full, so future creditors will know that the accounts were settled for less than the balance and this may scare them away.

In both cases, you could lose a couple hundred points off your credit score, but it all depends on how high your score is to begin with, as well as how many accounts you have on your credit report and how extensive the settlement/bankruptcy process is.

Differences Between Bankruptcy and Debt Settlement

The main two types of bankruptcy are Chapter 7 and Chapter 13. The former liquidates assets and uses the funds generated from this liquidation to pay creditors. The latter creates a repayment plan with a goal of repaying all debts within a fixed period of time using an installment plan that suits the filer.

Debt settlement, on the other hand, is more of a personal process, the goal of which is to offer a reduced settlement sum to creditors and debt collectors, clearing the debts with a lump sum payment that is significantly less than the balance.

Chapter 7 Bankruptcy and Chapter 13 Bankruptcy

When people think of bankruptcy, it’s often a Chapter 7 that they have in mind. With a Chapter 7 bankruptcy, all non-exempt assets will be sold, and the money then used to pay lenders. There are filing costs and it’s advised that you hire a bankruptcy attorney to ensure the process runs smoothly.

Chapter 7 bankruptcy is quick and complete, typically finishing in 6 months and clearing most unsecured debts in this time. There is no repayment plan to follow and no lawsuits or wage garnishment to worry about.

Chapter 13, on the other hand, focuses on a repayment plan that typically spans up to 5 years. The debts are not wiped clear but are instead restructured in a way that the debtor can handle. This method of bankruptcy is typically more expensive, but only worthwhile for debtors who can afford to repay their debts.

Filing for bankruptcy is not easy and there is no guarantee you will be successful. There are strict bankruptcy laws to follow and the bankruptcy court must determine that you have exhausted all other options and have no choice but to file.

Bankruptcy will require you to see a credit counselor, which helps to ensure that you don’t make the same mistakes in the future. This can feel like a pointless and demeaning requirement, as many debtors understand the rights and wrongs and got into a mess because of uncontrollable circumstances and not reckless spending, but sessions are short, cheap, and shouldn’t cause much stress.

How Debt Settlement Works

The goal of debt settlement is to get creditors to agree to a settlement offer. This can be performed by the debtor directly, but it’s often done with help from a debt settlement company.

The debt specialist may request that you stop making payments on your debts every month. This has two big benefits:

1. More Money

You will have more money in your account every month, which means you’ll have more funds to go towards debt settlement offers. 

The idea of making large lump sum payments can seem alien to someone who has a lot of debt. After all, if you’re struggling to make $400 debt payments every month on over $20,000 worth of debt, how can you ever hope to get the $5,000 to $15,000 you need to clear those debts in full?

But if you stop making all payments and instead move that money to a secured account, you’ll have $4,800 extra at the end of the year, which should be enough to start making those offers and getting those debts cleared.

2. Creditor Panic

Another aspect of the debt settlement process that confuses debtors is the idea that creditors would be willing to accept reduced offers. If you have a debt worth $20,000 and are paying large amounts of interest every month, why would they accept a lump sum and potentially take a loss overall?

The truth is, if you keep making monthly payments, creditors will be reluctant to accept a settled debt offer. But as soon as you start missing those payments, the risk increases, and the creditor faces the very real possibility that they will need to sell that debt to a collection agency. If you have a debt of $20,000, it may be sold for as little as $20 to $200, so if you come in with an offer of $10,000 before it reaches that point, they’ll snap your hand off!

Types of Debt

A debt settlement program works best when dealing with credit card debt, but it can also help to clear loan debt, medical bills, and more. Providing it’s not government debt or secured debt, it will work. 

With government debt, you need specific tax relief services, and, in most cases, there is no way to avoid it. With secured debt, the lender will simply take your asset as soon as you default.

Debt settlement companies may place some demanding restrictions on you, and in the short term, this will increase your total debt and worsen your financial situation. In addition to requesting that you stop making monthly payments, they may ask that you place yourself on a budget, stop spending money on luxuries, stop acquiring new debt, and start putting every penny you have towards the settlement.

It can have a negative impact on your life, but the end goal is usually worth it, as you’ll be debt-free within 5 years.

Pros and Cons of Debt Settlement and Bankruptcy

Neither of these processes are free or easy. With bankruptcy, you may pay up to $2,000 for Chapter 7 and $4,000 for Chapter 13 (including filing fees and legal fees) while debt settlement is charged as a fixed percentage of the debt or the money saved. 

As mentioned already, both methods can also damage your credit score. But ultimately, they will clear your debts and the responsibilities that go with them. If you’ve been losing sleep because of your debt, this can feel like a godsend—a massive weight lifted off your shoulders.

It’s also worth noting that scams exist for both options, so whether you’re filing bankruptcy or choosing a debt settlement plan, make sure you’re dealing with a reputable company/lawyer and are not being asked to pay unreasonable upfront fees. Reputable debt settlement companies will provide you with a free consultation in the first instance, and you can use the NACBA directory to find a suitable lawyer.

Bankruptcy and Debt Settlement: The End Goal

For all the ways that these two options differ, there is one important similarity: They give you a chance to make a fresh start. You can never underestimate the benefits of this, even if it comes with a reduced credit score and a derogatory mark that will remain on your credit report for years to come.

If you’re heavily in debt, it can feel like your money isn’t your own, your life isn’t secure, and your future is not certain. With bankruptcy and debt settlement, your credit score and finances may suffer temporarily, but it gives you a chance to wipe the slate clean and start again.

What’s more, this process may take several years to complete and in the case of bankruptcy, it comes with credit counseling. Once you make it through all of this, you’ll be more knowledgeable about debt, you’ll have a better grip on your finances, and your impulse control. 

And even if you don’t, you’ll be forced to adopt a little restraint after the process ends as your credit score will be too low for you to apply for new personal loans and high limit cards.

Other Options for Last Ditch Debt Relief

Many debtors preparing for debt settlement or bankruptcy may actually have more options than they think. For instance, bankruptcy is often seen as a get-out-of-jail-free card, an easy escape that you can use to your advantage whenever you have debts you don’t want to pay.

But that’s simply not the case and unless you have tried all other options and can prove that none of them have worked, your case may be thrown out. If that happens, you’ll waste money on legal and filing fees and will be sent back to the drawing board.

So, regardless of the amount of debt you have, make sure you’ve looked into the following debt relief options before you focus on debt settlement or bankruptcy. 

Debt Consolidation

A debt consolidation loan is provided by a specialized lender. They pay off all your existing debts and give you a single large loan in return, one that has a lower interest rate and a lower monthly payment. 

Your debt-to-income ratio will improve, and you’ll have more money in your pocket at the end of the month. However, in exchange, you’ll be given a much longer-term, which means you’ll pay more interest over the life of the loan.

A Debt Management Plan

Debt management combines counseling services with debt consolidation. A debt management plan requires you to continue making your monthly payment, only this will go to the debt management company and not directly to the creditors. They will then distribute the money to your creditors.

You’ll be given a monthly payment that you can manage, along with the budgeting advice you need to keep meeting those payments. In exchange, however, you’ll be asked to close all but one credit card (which can hurt your credit score) and if you miss a payment then your creditors may back out of the agreement.

Balance Transfer Card

If all your debts are tied into credit cards, you can use a balance transfer credit card to make everything more manageable. With a balance transfer credit card, you move one or more debts onto a new card, one that offers a 0% APR for a fixed period. 

The idea is that you continue making your monthly payment, only because there is no interest, all the money goes towards the principal.

Home Equity Loans

If you have built substantial equity in your home then you can look into home equity loans and lines of credit. These are secured loans, which means there is a risk of repossession if you fail to keep up your payments, but for this, you’ll get a greatly reduced interest rate and a sum large enough to clear your debts.

Bottom Line: The Best Option

Debt settlement and bankruptcy are both considered to be last resort debt-relief options, but they couldn’t be more different from one another. Generally speaking, we would always recommend debt settlement first, especially if you have a lot of money tied up in credit card debt.

If not, and you can’t bear the idea of spending several months ignoring your creditors, missing payments, and accumulating late fees, it might be time to consider bankruptcy. In any case, make sure you exhaust all other possibilities first.

Debt Settlement vs Bankruptcy: Which is Best? is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

Different Types of Debt

Debt comes in all shapes and sizes. You can owe money to utility companies, banks, credit card providers, and the government. There’s student loan debt, credit card debt, mortgage debt, and much more. But what are the official categories of debt and how do the payoff strategies for these debts differ?

Categories of Debt

Debt is generally categorized into two simple forms: Secured and Unsecured. The former is secured against an asset, such as a car or loan, and means the lender can seize the asset if you fail to meet your obligations. Unsecured is not secured against anything, reducing the creditor’s control and limiting their options if the repayment terms are not met.

A secured debt provides the lender with some assurances and collateral, which means they are often prepared to provide better interest rates and terms. This is one of the reasons you’re charged astronomical rates for credit cards and short-term loans but are generally offered very favorable rates for home loans and car loans.

If the debtor fails to make payments on an unsecured debt, such as a credit card, then the debtor may file a judgment with the courts or sell it to a collection agency. In the first instance, it’s a lot of hassle without any guarantee. In the second, they’re selling the debts for cents on the dollar and losing a lot of money. In either case, it’s not ideal, and to offset this they charge much higher interest rates and these rates climb for debtors with a poorer track record.

There is also something known as revolving debt, which can be both unsecured and secured. Revolving debt is anything that offers a continuous cycle of credit and repayment, such as a credit card or a home equity line of credit. 

Mortgages and federal student loans may also be grouped into separate debts. In the case of mortgages, these are substantial secured loans that use the purchase as collateral. As for federal student loans, they are provided by the government to fund education. They are unsecured and there are many forgiveness programs and options to clear them before the repayment date.

What is a Collection Account?

As discussed above, if payments are missed for several months then the account may be sold to a debt collection agency. This agency will then assume control of the debt, contacting the debtor to try and settle for as much as they can. At this point, the debt can often be settled for a fraction of the amount, as the collection agency likely bought it very cheaply and will make a profit even if it is sold for 30% of its original balance.

Debt collectors are persistent as that’s their job. They will do everything in their power to collect, whether that means contacting you at work or contacting your family. There are cases when they are not allowed to do this, but in the first instance, they can, especially if they’re using these methods to track you down and they don’t discuss your debts with anyone else.

No one wants the debt collectors after them, but generally, you have more power than they do and unless they sue you, there’s very little they can do. If this happens to you, we recommend discussing the debts with them and trying to come to an arrangement. Assuming, that is, the debt has not passed the statute of limitations. If it has, then negotiating with them could invalidate that and make you legally responsible for the debt all over again.

Take a look at our guide to the statute of limitations in your state to learn more.

As scary as it can be to have an account in collections, it’s also common. A few years ago, a study found that there are over 70 million accounts in collections, with an average balance of just over $5,000.

Can Bankruptcy Discharge all Debts?

Bankruptcy can help you if you have more debts than you can repay. But it’s not as all-encompassing as many debtors believe.

Chapter 7 bankruptcy will discharge most of your debts, but it won’t touch child support, alimony or tax debt. It also won’t help you with secured debts as the lender will simply repossess or foreclose, taking back their money by cashing in the collateral. Chapter 13 bankruptcy works a little differently and is geared towards repayment as opposed to discharge. You get to keep more of your assets and in exchange you agree to a payment plan that repays your creditors over 3 to 5 years.

However, as with Chapter 7, you can’t clear tax debts and you will still need to pay child support and alimony. Most debts, including private student loans, credit card debt, and unsecured loan debt will be discharged with bankruptcy.

Bankruptcy can seriously reduce your credit score in the short term and can remain on your credit report for up to 10 years, so it’s not something to be taken lightly. Your case will also be dismissed if you can’t show that you have exhausted all other options.

Differences in Reducing Each Type of Debt

The United States has some of the highest consumer debt in the world. It has become a common part of modern life, but at the same time, we have better options for credit and debt relief, which helps to balance things out a little. Some of the debt relief options at your disposal have been discussed below in relation to each particular type of long-term debt.

The Best Methods for Reducing Loans

If you’re struggling with high-interest loans, debt consolidation can help. A debt consolidation company will provide you with a loan large enough to cover all your debts and in return, they will give you a single long-term debt. This will often have a smaller interest rate and a lower monthly payment, but the term will be much longer, which means you’ll pay much more interest overall.

Debt management works in a similar way, only you work directly with a credit union or credit counseling agency and they do all the work for you, before accepting your money and then distributing it to your creditors.

Both forms of debt relief can also help with other unsecured debts. They bring down your debt-to-income ratio, leave you with more disposable income, and allow you to restructure your finances and get your life back on track.

The Best Methods for Reducing Credit Cards

Debt settlement is the ultimate debt relief option and can help you clear all unsecured debt, with many companies specializing in credit card debt. 

Debt settlement works best when you have lots of derogatory marks and collections, as this is when creditors are more likely to settle. They can negotiate with your creditors for you and clear your debts by an average of 40% to 60%. You just need to pay the full settlement amount and the debt will clear, with the debt settlement company not taking their cut until the entire process has been finalized.

A balance transfer can also help with credit card debt. A balance transfer credit card gives you a 0% APR on all transfers for between 6 and 18 months. Simply move all of your credit card balances into a new balance transfer card and then every cent of your monthly payment will go towards the principal.

The Best Methods for Reducing Secured Debts

Secured debt is a different beast, as your lender can seize the asset if they want to. This makes them much less susceptible to settlement offers and refinancing. However, they will still be keen to avoid the costly foreclosure/repossession process, so contact them as soon as you’re struggling and see if they can offer you anything by way of a grace period or reduced payment.

Most lenders have some form of hardship program and are willing to be flexible if it increases their chances of being repaid in full.

Different Types of Debt is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

All About the Statute of Limitations on Debt

All About the Statute of Limitations on Debt

Paying off debt can be an excruciating process, depending on how much money you owe. But your debts may not haunt you forever. Most consumer debts have a statute of limitations. That means that after a certain amount of time has gone by, collectors can’t sue you for failing to pay off outstanding debts. Here’s everything you need to know about the statute of limitations on debt.

See how long it’ll take to pay off your credit card debt.

Understanding the Statute of Limitations on Debt

You can be taken to court for not paying off certain debts. But there’s a limit on how long debt collectors can chase after the borrowers they want to sue.

The period in which someone can take legal action against you for owing money is known as the statute of limitations. In many cases, that time period either begins on the date you last made a payment or when your account becomes delinquent (which usually happens 30 days after a borrower fails to make a payment). But sometimes, the statute of limitations begins whenever you last used the account, acknowledged that you owed debt or agreed to make a payment (more on that later).

Statutes of limitations offer consumers with old debts some protection from debt collection agencies. After the statute of limitations on a debt expires, that unpaid debt is considered to be time-barred. At that point, borrowers no longer have a legal obligation to pay off their debts.

Different states have different statutes of limitations. And there are different rules attached to different types of debts. In Iowa for example, the statute of limitations on credit card debt is 10 years. In Alaska, Alabama and Washington D.C. it’s only three years.

Not all consumer debts have a statute of limitations, however. Federal student loans, for example, haven’t had a legal expiration date for over two decades.

What to Do With Time-Barred Debts 

All About the Statute of Limitations on Debt

While you may no longer be legally responsible for your time-barred debts, you’re not totally off the hook. Most negative credit information – like unpaid debts – can stay on your credit report for up to seven years. But tax liens can remain on your credit report for up to 15 years and bankruptcies can be reported for 10 years.

Not repaying the old debt you owe after the statute of limitations expires could hurt your credit score. And you could have a hard time trying to buy a house or take out a new loan.

Related Article: The Worst Ways to Deal With a Bill Collector

If you decide to pay off an old debt, it’s important to make sure you have documentation confirming that the debt is yours before making a single payment. You may have to pay off your debt in full in order to avoid restarting or extending the statute of limitations on your debt. So talking to a lawyer before making a single payment is a good idea.

When a Collector Asks About Your Time-Barred Debt

Even though you can’t be sued for your time-barred debts, a debt collector may try to come after you anyway. Bill collectors are required to follow certain rules under the Fair Debt Collection Practices Act (FDCPA). But they have the right to contact you even after the statute of limitations on a debt runs out. If a debt collector threatens to sue you for a time-barred debt, he or she could be violating the FDCPA.

Statutes of limitations can be tricky. So if you’re not sure whether your debt is past its legal expiration date, it’s a good idea to ask a debt collector who contacts you if your debt is time-barred. If he or she says no, it’s best to ask for the date of the last payment and request written proof that the debt they’re trying to collect is actually yours.

You’ll need to be careful when speaking to debt collectors, especially when dealing with a debt you believe is time-barred. If you say the wrong thing, the statute of limitations could be restarted or extended and you could end up having to pay a bill collector what you owe. The debt collector could also sue you and win.

The clock on your debt can restart if you admit to owing a debt, promise to start paying it or attempt to start repaying it by sending money to a debt collector. But the guidelines associated with extending and restarting the statute of limitations vary depending on where you live.

Related Article: Understanding Debt

Final Word

All About the Statute of Limitations on Debt

If you don’t know if the statute of limitations on your debt has expired, you can check with someone from a local legal aid society, an attorney or your state attorney general’s office. Or you can figure it out yourself by finding out when the statute of limitations begins and looking up your state’s laws regarding the statute of limitations on debts.

After you can confirm that the statute of limitations on your debt has in fact expired, you’ll have to decide what to do with it. You can pay off the debt and improve your credit score or ignore it and wait until it disappears from your credit report. You could also dispute the old debt or try to work out an agreement so that you end up paying less than what you owe your creditor.

Photo credit: ©iStock.com/Geber86, ©iStock.com/fstop123, ©iStock.com/ozgurdonmaz

The post All About the Statute of Limitations on Debt appeared first on SmartAsset Blog.

Source: smartasset.com

New Rules May Offer You More Protection Against Debt Collectors

New Rules May Offer You More Protection Against Debt Collectors

Dealing with debt collectors can be a real drag, especially if they’re constantly hounding you to pay up. The Fair Debt Collection Practices Act (FDCPA) protects consumers against harassment from debt collectors but the industry still generates millions of complaints each year. Fortunately, the Consumer Financial Protection Bureau (CFPB) has proposed new guidelines that shield debtors from abusive debt collection efforts.

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The Proposed Rules

New Rules May Offer You More Protection Against Debt Collectors

In July, the CFPB proposed a new set of rules aiming to completely revamp the debt collection market. The proposal is focused primarily on doing two things: limiting contact between debt collectors and consumers and making sure that collection agencies have accurate information before they try to collect on a debt.

The proposed rules are meant to alleviate some of the problems associated with the debt collection industry, which affects about 70 million Americans. Essentially, the CFPB wants to increase transparency and cut down on errors and inaccuracies. The agency’s proposed rules would require debt collectors to do the following:

  • Verify that they’re collecting the right debt. Debt collectors would need to make sure that they’re targeting the right person before trying to collect a debt. Specifically, they’d have to verify the debtor’s name, address, phone number, account number, date of default and the amount of debt that’s owed.
  • Limit how often they contact consumers. Instead of calling debtors repeatedly or flooding their mailboxes with letters, debt collectors would be limited to contacting them six times per week.
  • Simplify the dispute process. Consumers have the right to dispute a debt but the CFPB wants to take things one step further. Debt collectors would have to give as much information as possible about debts when sending out written collection notices. They’d have to include a form that consumers could mail in to dispute their debt.
  • Provide written verification. If a consumer mails in the form to dispute a debt, the debt collector would have to mail them a written debt report. The collection agency would be barred from pursuing the debt without sending out a report.
  • Review documentation of debts before trying to collect. Debt collectors wouldn’t be able to collect anything until they’ve reviewed the documents related to the debt. If a collector wanted to sue someone, they’d need sufficient evidence and documentation of the debt.
  • Notify other debt collectors of disputes. If a debt collector sells your debt to another collection agency after you’ve disputed it, the new collector wouldn’t be able to come after you before resolving the dispute.

Related Article: The Worst Ways to Deal With a Bill Collector

When Would the New Rules Go Into Effect?

New Rules May Offer You More Protection Against Debt Collectors

The proposed rules need to be reviewed by small business leaders and industry experts before they can be implemented. But if the CFPB successfully pushes them through, they could go into effect in 2017. In the meantime, you’re still covered by the FDCPA.

In case you’re not sure what your rights are, here’s a quick rundown of what debt collectors can’t do:

  • They can’t make false statements. A debt collector can’t give out false information about the amount of debt you owe or say that you’ve broken the law by falling behind on debt payments.
  • They can’t use unfair practices to collect. Debt collectors can’t try to garnish certain assets in order to cover your debts. For example, they can’t take a portion of your Social Security benefits, your workers’ compensation benefits or your Supplemental Security Income.
  • They can’t harass you. Debt collectors can’t threaten you or be verbally abusive. They can’t use profane or obscene language or call you repeatedly just to annoy you.

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Final Word

There is some opposition to the CFPB’s proposals. So we’ll have to wait and see what happens. In the meantime, if a debt collector has been hounding you or your feel that your rights have been violated, you can file a complaint with the Consumer Financial Protection Bureau.

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The post New Rules May Offer You More Protection Against Debt Collectors appeared first on SmartAsset Blog.

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