When should you consider bankruptcy instead of debt settlement?

 

When should you consider bankruptcy instead of debt settlement?

Tim Cella

used to work at several law firms

I’ve seen many people file bankruptcy over the years. The law firm I used to work at rarely did debt settlements. If you’re thinking about bankruptcy, things are probably far beyond debt settlement. I would consider the following in making your decision:

Cost and Duration: Debt settlement can be a more lengthy and costly process than bankruptcy. If you engage a debt settlement company, you might pay fees as high as 20%-25% of your original debt​​. Bankruptcy, on the other hand, can offer immediate relief and a fresh start, though it also carries long-term consequences​​.

Immediate Relief Needs: If you need immediate relief and are unable to pay monthly fees that are often associated with debt settlement plans, bankruptcy may be the best or only solution​​.

Extent of Debt: Bankruptcy, particularly Chapter 7, can be completed within six to nine months, providing a quicker resolution in many cases. However, Chapter 13 bankruptcy can take up to five years for a discharge and has limits on the amount of debt that can be included​​.

Financial Thresholds: If your monthly debt payments, excluding mortgage or rent, exceed 20% of your income, it's an indicator that you have a significant debt issue that needs to be addressed. The severity of your debt situation and your commitment to resolving it can influence whether debt settlement or bankruptcy is more appropriate​​.

Risk of Asset Loss: Bankruptcy might be preferable if you're at risk of losing your home or if you would have to deplete your savings to pay off debt​​.

Remember, if you’ll never pay off the debt - you need a bankruptcy. There is no point if the hole you’ve dug keeps getting bigger. That’s my 2 cents. Consulting with a financial advisor or a bankruptcy attorney can provide personalized advice tailored to your unique financial situation.