Why a Debt Settlement Program is an Effective Alternative to Bankruptcy

Why a Debt Settlement Program is an Effective Alternative to Bankruptcy

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For those who are dealing with a significant amount of debt and a reduction of income, bankruptcy can be very appealing. After all, it wipes the slate clean, giving you a fresh start.

With consumer credit card debt on the rise, many believe that bankruptcy is the only viable solution. It’s not. In fact, debt settlement could be a viable solution. So you may be wondering why a debt settlement program is the better alternative to bankruptcy.

Read on to learn the reality of trying to file for bankruptcy and the benefits that working with a debt settlement company can bring.

The 2005 Changes to Bankruptcy Law

Before 2005, the rules for obtaining bankruptcy were rather flexible, allowing more individuals access to this option. In 2005, however, those laws were tightened, making it harder to qualify, as well as increasing the consumer education aspects of this major piece of reform. The result is that the focus has shifted away from discharging debt and more toward an education process meant to help individuals manage their finances more effectively.

Therefore, the number of individuals who qualified decreased, while demand for credit counseling began to rise. Those who could qualify for bankruptcy found themselves having to undergo mandatory credit counseling before they could even file.

The Means Test

Part of the reality of trying to file bankruptcy now is the means test. If your current monthly income is less than the median income in your state, you’ll be able to file for bankruptcy under Chapter 7. On the other hand, if your income is higher than the state average and you can afford to pay $100 toward your debt, then you must file under a Chapter 13.

Other factors play a part in the means test, but it’s a significant part of determining what you’re eligible for.

Child Support Cannot Be Cleared

For those who owe a significant amount of child support, filing bankruptcy will not eliminate that debt. Instead, back child support will be given higher priority over every other creditor. Therefore, whatever repayment plan is decided on by the courts, your child support will be the first to get paid.

Long-Term Realities

While it might seem that bankruptcy is the easy way to repair your debt situation, it can also have a negative impact on your credit score, one that will stick with you for years to come. In the meantime, bankruptcy protections during the filing process have been limited by changes in 2005, meaning that you could still be forced to leave your home as part of an eviction, even if you have filed for bankruptcy.

Once you have a bankruptcy on your credit record, it can be hard to obtain financing for a home, business, or personal use, including credit cards. If you can obtain financing, the interest rates are likely to be higher, thus, you’ll be paying more for your financing over time. However, there is a viable alternative.

Benefits of Debt Settlement

Debt settlement is a means to avoid bankruptcy by settling with your debt collectors before it reaches the courts. This type of settlement is used most often with credit card debt and can be a way to avoid more damage to your credit score. Debt settlement also can be seen as a compromise, with the creditor receiving a portion of repayment, while the debtor can settle that debt without further impact to their credit score.

Although you may have to agree to pay a lump sum, the impact on your credit score is less than bankruptcy. Your credit report will show that you settled the debt, but after seven years, this will no longer be highlighted. Genuine debt settlement companies can negotiate on your behalf, helping you to reduce your debt and clear up your credit.

If you’re considering bankruptcy, contact us to find out if debt settlement is the right alternative for you.

The Effective Legal Debt Solutions team is comprised of caring, seasoned professionals with years of industry knowledge coupled with personal real-life experience of dealing with debt settlement situations that many of our clients are facing today.