Which option is better for your debt dilemma?
Image via Letizia Bordoni on Unsplash
When you’re drowning in debt, you may be desperate for solutions. Those debt settlement ads you hear on the radio and see on TV sound great. They often promise to get you out of debt fast and for pennies on the dollar. Unfortunately, the reality of debt settlement is that it could cost you more in the long run than you already owe, worsen your credit score, and dig you deeper into a bad situation. Many of these ads also promise that their solution is preferable to bankruptcy but, in many cases, that’s just not true. Here’s a look at the difference so you can make an informed decision.
How Debt Settlement Works – It’s Not a Miracle Cure
Debt settlement companies hope to lessen your debt by getting your creditors to agree to take a smaller amount than you currently owe. However, to gain the leverage needed to make an acceptable offer, you have to be seriously delinquent on your bills. Debt settlement companies usually have you make payments to them that goes into an account, and they do not pay your creditors. Instead, they intentionally let you fall further and further behind on your obligations. Why do they do that?
If you’re current on your credit card and other payments, there’s no incentive for a creditor to negotiate and possibly reduce your debt. That part makes sense. However, when you don’t pay your bills, even if it’s part of an overall debt strategy, negative consequences result. The debt settlement firm allows your debts to lapse which lowers your credit score, triggers collections activity, and then finally when they feel your accounts are delinquent enough, they open negotiations with the creditor, hoping for the best.
Debt Collectors Come Calling While You're Waiting for a Deal
Even though you signed up with a debt settlement firm, that won’t stop your creditors from trying to collect the debt from you. If you’ve ever run late on a bill, you know that your phone will start ringing. You’ll get calls at home, work, and on your cell. Telling them that you’re working with a debt collection firm probably won’t help either. You can expect your credit score to drop every month that you allow the situation to continue, and debt collectors might get more aggressive.
If you tell a debt collector or creditor that you’re working with a debt collection firm, they might move forward with a lawsuit against you to get a judgment for the full amount to try and improve their chances of payment. Once a creditor sues you, you’ll have to go to court to try and fight the debt, argue the amount, or plea to the judge that you can’t afford what you owe. And if you don’t go to court, the creditor will get a default judgment for the full amount they request, and that’s a problem for you.
How Bankruptcy Differs from Debt Settlement
When you decide to try debt settlement, you don’t know what the outcome will be - you only know what the firm promised you in their slick ads. In fact, they don’t even know what results they can get for you. But with bankruptcy, you know going into it the exact debt relief you can get and the outcome you will achieve. If you have only unsecured debt such as credit cards, medical bills, etc., then all of that can be 100% wiped out in Chapter 7 bankruptcy.
If you have a mix of unsecured and secured debt (mortgage, car loan, etc.), you may need to consider Chapter 13 over Chapter 7 bankruptcy. Either way, as soon as you file, debt collectors must stop contacting you, by law. Also, any debt lawsuits that were filed, but not completed, can be stopped in their tracks. If you’ve been threatened with foreclosure or repossession, that gets put on hold as well. Plus, the impact is immediate, and there’s no uncertainty while you wait for promised results that may or may not happen with debt settlement.
Consider the Costs Carefully
There’s also the cost to consider. Bankruptcy costs are a flat fee that’s affordable – far more affordable than dealing with debt you can’t pay. Debt settlement, by comparison, can be cost prohibitive with many firms charging 20% of your gross debt as a fee to manage the process for you. On top of that, the fee might not get you significant debt relief and can cause you more problems rather than solving any. To find out whether bankruptcy is a better fit for you than debt settlement, contact us today.
Call 1-888-234-4181 to reach the Law Offices of John T. Orcutt to schedule a free North Carolina bankruptcy consultation at one of our convenient locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington. Be sure to read reviews from our clients to see what you can expect from your fresh financial start.