You've probably heard the soothing radio ads. "Don't file for bankruptcy," they coo. "Let us help you settle your debts."
But is debt settlement a better option than bankruptcy? The short answer is "no."
First off, many debt settlement offers are outright scams, as Michigan Governor Jennifer Granholm warned in a radio address earlier this year. Unregulated, fly-by-night companies spring up, take your money, then disappear.
Even regulated companies may not offer much in the way of real debt relief. Experienced credit counselors will tell you that of the thousands of debt-settlement offers out there, there are few companies they would personally trust to resolve a client's debts. They'll tell you the bar to qualify and become a credit counselor at these companies is shockingly low.
Debt settlement is not debt consolidation. In debt consolidation, you reorganize many debts into a single loan with one payment, which can help lower your monthly expenses. Debt settlement will not do that.
In debt settlement, you'll stop paying on your credit cards and other loans. Instead of paying your bills, you'll make payments to the debt settlement company, which will let the payments accumulate in an account until there's enough money to make a settlement offer to one of your creditors. While this is happening, the debt settlement company collects a monthly fee from you, further sapping your resources.
In the meanwhile, you incur late fees on your credit cards, and your interest rate is raised to the sky. Your credit score plummets.
The settlement company may tell you your credit-card accounts will settle for less than half of what you owe -- but that may or may not turn out to be true. Creditors often don't take this treatment lying down, so get ready for some rude phone calls and letters. They may seek to garnish your wages to get what they're owed.
Finally, if you do succeed in using debt settlement to reduce your debt, you will owe a big tax bill. The amount of debt your creditors forgive is considered income to you by the IRS, and you will owe income tax on it!
Contrast all this stress with what happens when you declare bankruptcy. A bankruptcy filing immediately stops the phone calls and letters from your lenders. It also stops your creditors from garnishing your wages. If you are behind on your mortgage, your bank cannot foreclose while you are in bankruptcy. You do not have to make payments on your debts while your bankruptcy case proceeds.
If you file a Chapter 7 bankruptcy, you can erase many of your debts in just a few months. In Michigan, you will be able to keep many of your personal belongings.
If you file for Chapter 13 bankruptcy, you will have several years to slowly pay off your debts at a pace you can afford. Your creditors will have to accept the repayment plan the court approves for you.
Have questions about whether filing for bankruptcy would help you end your financial problems? Contact experienced bankruptcy attorney Lander McLoyd for a free Michigan bankruptcy consultation. We're here to help!
Photo via Flickr user michael_swan