Getting your credit card debt under control is one of the first steps in regaining your financial health. If paying off your debt in its entirety isn't possible, both debt settlement and bankruptcy are options. Each has its own benefits and pitfalls, so thoroughly investigate both approaches, and don't be afraid to ask for guidance from legal and financial experts.
Credit Card Settlement
Some credit card companies will settle your account for less than you owe, providing that you have enough cash to pay them a lump sum. In most cases, you'll have to close your account, but you'll have a zero balance and stay out of bankruptcy court. Try to avoid working with a debt settlement firm and instead negotiate directly with your credit card companies. Debt settlement firms often charge high up-front fees. Also, you may have a decent chance -- and do a good job -- of negotiating on your own. Get your settlement offer in writing before you submit a payment.
Bankruptcy
Bankruptcy protects you from your creditors and their collection attempts by either wiping out all of your dischargeable debt or providing you with a supervised repayment plan. Bankruptcy is often a last resort, but is useful when you don't have enough cash to settle your accounts or creditors refuse to work with you. In a Chapter 7 bankruptcy, you agree to let the court liquidate what assets you do have in exchange for a discharge of your debt. Credit card debt usually qualifies for a full discharge. In Chapter 13 bankruptcy, you repay your debts over a three-to-five year period: The bankruptcy court discharges any remaining unsecured debt at the end of five years.
Credit Consequences
Both debt settlement and bankruptcy can have a negative impact on your credit score. In debt settlement, your creditors will probably report your account as settled for less than the full amount owed, unless you can persuade them to delete the account entirely as part of your negotiations. Information about your debt settlement, as well as any late payments, stays on your credit report for up to seven years. Bankruptcy is a matter of public record and cannot be negotiated off your credit report. Credit bureaus report Chapter 7 bankruptcies for 10 years, although some, such as Experian, report Chapter 13 bankruptcy for only seven years.
Tax Considerations
Debt settlement has some unpleasant tax consequences for debtors. If your credit card company forgives $600 or more in debt, it must file a 1099-C form with the IRS. The IRS then treats your forgiven debt as income, and you must pay taxes on it. If a bankruptcy court discharges your debt, you are not required to pay taxes on it.
Seeking Help
Getting help from a qualified credit counselor in setting a budget can sometimes help you entirely avoid debt settlement or bankruptcy. Still, you may be so overextended that even a good budget won't help you. If you file for bankruptcy, you still need to complete credit counseling, but it is a good idea to speak to a bankruptcy lawyer about your options, according to Liz Pulliam Weston of MSN Money. Ms. Weston suggests this because credit counselors generally make their money from setting up debt management plans with creditors, giving them little financial incentive to recommend bankruptcy. On the other hand, a good bankruptcy lawyer can make you aware of all your options, including both Chapter 7 and Chapter 13 bankruptcies.
0 comments:
Post a Comment