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Using a Debt Settlement Company Instead of Bankruptcy
Using a debt settlement company, as opposed to declaring bankruptcy, can have credit advantages. A wise debtor will do his homework before choosing.
The Difference Between Settlement and Bankruptcy
Debt settlement is an agreement between a debtor and creditor to wipe out a delinquent debt by virtue of the debtor’s payment of less than the original debt. Debt settlements are negotiated, either between the debtor and creditor or between the debtors contracted professional and the creditor. Using a debt settlement company can relieve the debtor of the often negative and time-consuming process of negotiating with creditors himself.
Bankruptcy is the process of eliminating debt in one of two ways. A Chapter 13 bankruptcy is a type of debt settlement which is legally binding and involves each creditor settling for an amount less than the original debt and for payments over a several year period. In this case, an attorney is usually appointed by the court to manage the payments, and he/she receives some remuneration for doing so. A Chapter 7 bankruptcy wipes out all debt, and occurs when the debtor has very few assets. In this case, the creditors receive nothing, the debtor pays his attorney’s fees, and a “fresh start” is granted.
Perhaps the biggest reason for choosing debt settlement rather than bankruptcy is the effect on one’s credit rating. A bankruptcy of any kind remains on one’s credit report for 10 years, and the uphill climb back from the bankruptcy takes great self-discipline and commitment. For example, if, after a bankruptcy, a debtor is late on any payment at all, potential future creditors will probably not take a risk in extending any credit. Certainly, mortgage lenders will not consider a loan if this has happened. Any other credit granted will be at an enormous interest rate.
Debt settlement, on the other hand, can be negotiated with an eye toward not affecting the credit rating, and this should be made clear to any debt settlement company or attorney being contracted to complete the negotiations for the debtor. If the debt has already been turned over to a collection agency or company, the credit rating has already taken a “hit” which cannot be removed. Now, the goal is to prevent any further hits by the manner in which the settlement is recorded on the credit report. A good debt settlement company or professional will be able to negotiate how the settlement is reported to the major credit bureaus, and this is critical. The settlement needs to be reported as “paid,” not “settled.” The credit rating may then actually jump, as it normally does anytime a debt is paid off. Creditors are usually quite willing to negotiate how the debt is reported if they are going to get payment in return.