Why Bankruptcy is Better Than Debt Settlement
Hi, my name is Marshall Cohen. I’ve been a practicing bankruptcy attorney for 27 years.
People often ask me, “Marshall – why would I file bankruptcy when I can do debt settlement? What’s the difference?”
There are three things that debt settlement companies don’t tell you – The first is debt settlement’s expensive! Secondly, debt settlement ruins your credit. And third, that settlement doesn’t offer you any legal protection against your creditors.
Let’s say for example, you’ve got a hundred dollar debt and you go to a debt settlement company and they’re able to settle that debt for 40 cents on the dollar. That seems like a pretty god deal, but here’s the problem: First of all you’re going to have to pay 40 cents of the dollar to settle that debt. Secondly, the debt settlement company is likely going to charge you one-half of your savings for their services. So when you have a hundred dollar debt, and you have to pay $40 to settlement, and you have to pay $30 to the debt settlement company, you’re already out of pocket $70 on a hundred dollar debt.
Now, to add insult to injury, the company that agreed to settle your debt is likely going to send you a 1099. You’re going to be taxed on that $60 savings. If you’re paying 20% taxes, that means you’re going to have to pay an additional $12 to Uncle Sam for the privilege of having settled.
At $100 debt, when you add it all up, it means you’re actually only going to save $18 for having settle $100 debt. That’s really not much savings at all!
The second thing is that debt settlement may ruin your credit. Here’s how debt settlement companies often work – debt settlement companies settle the easiest debts first. That means we settle the lowest amounts that they can quickly get out of the way.
Well, in the meantime, the large debts aren’t settled. They’re not receiving payment and they may continue to report derogatory information on your credit report each month, that they’re not receiving payment.
If it takes 2 or 3 years to settle a debt, you may have 2 or 3 years of delinquent payments. To a large debt, the only thing this will accomplish is driving down your credit score and it could takes years for your credit score to rebound.
The last thing that so many companies don’t tell you is that they offer you no legal protection. Debt settlement companies aren’t lawyers. If you’re sued, they can’t represent you in a court. They can’t give you legal advice, and can’t give you any protection. There’s nothing that a debt settlement company can do to actually protect you from a creditor.
So, by contrast, bankruptcy is cheaper. It provides you immediate legal protection from your creditors, and the discharge in bankruptcy has the effect of closing the accounts so that you have the opportunity to rebuild your credit.
That’s your fresh start.
Bankruptcy is cheaper because first of all, you don’t have to repay money to your creditors. And secondly the cost of hiring a bankruptcy attorney is often substantially less than the amount you would have to pay to the debt settlement company.
When you file bankruptcy the bankruptcy laws provide an immediate court injunction of the case file that stops your creditors from taking any action to collect a debt. This means that lawsuits wage garnishes and bank attachments are automatically stopped.
And finally, the effect of the discharge in bankruptcy is that it closes the account you haven’t been able to pay. This if your bankruptcy fresh start, and this is what allows you to rebuild your credit.
So in general, the difference between debt settlement and bankruptcy is bankruptcy is cheaper, it offers you legal protection, and it offers you a fresh start, allowing you to rebuild your credit.
If you’d like to consider filing a bankruptcy case please give me a call – you can reach me at 614-294-5040.