A large number of people are struggling to get out of the debt crisis. In a majority of the cases, too much usage of credit cards is mainly responsible for the debt troubles. It is often seen that most of the people tend to carry multiple credit cards and love to use them mindlessly. And the outcome is, they fall into credit card debt.
However, debts are harmful. You must get rid of debts unless it may damage your financial health. If you have a huge debt and you’re unable to pay them off, then you need to try the best possible way before turning the situation even worse.
A variety of solutions such as debt management, debt consolidation, self-repayment option, debt settlement, and bankruptcy are there to get out of debt problem, but you need to pick the right one to get the best result. If you don’t know which option will be best for you, then this article is a must-read for you.
What is Debt settlement and what its impact on your finances?
Debt settlement is an effective process that can help you to negotiate with your creditors to lessen the debt amount you owe. The reduction in the debt amount makes it easier for you to pay it off. You can negotiate with creditors on your own. But if your debt amount is huge, then you’re required to find a genuine debt settlement company.
The settlement company analyzes your financial situation and negotiate with your creditors and finalizes an amount that is much less than your total outstanding balance. You need to pay a one-time settlement amount to the settlement company to get out of debt worries. The settlement company will distribute the amount to the creditors according to the negotiation.
Impact of debt settlement on your finances
Remember, you’re required to pay a one-time lump sum payment to the settlement company to get rid of debts. Make sure you’ve enough money before approaching to the settlement company. However, unlike in the debt consolidation program, the debt settlement process brings down your credit score to some extent. Your creditors will have the final say when you want to settle your credit card debts. But there are many benefits to this program.
Other effects that debt settlement has on your financial condition are as follows:
- The settlement program helps you to get out of the debts in a short period.
- It reduces your payable debt amount by a considerable limit.
- The settlement program helps you to reduce the interest amounts and stop penalties, late payments, and extra charges.
- Seeking debt settlement can bring down your credit score by 70-125.
- Your credit report will be updated as ‘Paid as Settled’ or ‘Paid as Agreed’.
- The amount you save through settlement will be granted as your income, and charges tax on that as per the IRS.
What is Bankruptcy and what its impact on your finances?
There is another process that can help you to get out of debt is filing bankruptcy. Bankruptcy implies that you’re unable to pay off your debts any further. You’re required to file a petition in a court for bankruptcy, once you think there is no other way out of your debt issues.
However, this process is much more aggressive than debt settlement and is the last option to pay off debt. Bankruptcy helps you to discharge all of your debts. There are mainly two chapters under which you’re allowed to file such as Chapter 7 and Chapter 13 bankruptcy.
In Chapter 7 bankruptcy, the court will appoint a bankruptcy trustee. The trustee checks your assets and then arrange to sell off those or use those to pay your creditors and lenders. In Chapter 13 bankruptcy, none of your assets are taken away. You need to go on making the payments against your debts as per the repayment plan formulated by the bankruptcy court.
Impact of bankruptcy on your finances
Chapter 7 bankruptcy wipes out all your debts while the Chapter 13 draws out a repayment plan for you and allows you to pay back your debts over a few years by selling your assets and savings from your monthly income.
- It helps you to discharge the major portion of your debt.
- Bankruptcy is costly. You need to pay legal charges and attorney fees.
- The Chapter 7 bankruptcy takes 3-4 months and Chapter 13 will continue for 3-5 years to eliminate debts.
- It will affect your credit score negatively. It brings down your credit score by 200-250.
- Your credit reports will be updated as ‘Discharged in Bankruptcy’.
- The effect stays on your report for 7 – 10 years. Thus, you’ll be difficult for you to take out new loans, or take part in any financial transaction after filing bankruptcy.
Bankruptcy or debt settlement: which option is better for you?
If this is what you are doubtful about, then you can consider a settlement program to eliminate your debts. It affects your credit report much less than bankruptcy. Remember, both are effective debt-relief options, but filing bankruptcy should be your last option. But, it’s always advisable to consult with a financial advisor before making the final decision. The advisor can tell you which option will suit you best according to your financial condition and the total.