Is bankruptcy cheaper than a debt settlement? - Bankruptcy Law Questions and Answers- LawQA.com

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Is bankruptcy cheaper than a debt settlement?

What is the difference between debt settlement and bankruptcy? I have several maxed credit cards that I can't pay and need to get rid of this debt. Is bankruptcy cheaper than a debt settlement?

Answer By David VanDyke
Bird & VanDyke, Inc.
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Yes it can be far cheaper and it will resolve your debt issues. Debt settlement is not a right and does not always work.

Answer Applies to: California
Replied: 9/23/2011

Answer By Bill Zurinskas
Bankruptcy Law Center
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Bankruptcy is always cheaper than debt settlement. For example, let's say you have $30,000 in unsecured debt on average bankruptcy and that you are paying the average fee for a chapter 7 bankruptcy of $1500. If you settle the debt at 50%, which is the average rate for debt settlement, you will pay $15,000 to settle your debts plus you may pay income taxes on an additional $15,000 of income. If you are at the 20% rate for income taxes, that will cost you an additional $3000 in income taxes. In the past 15 years a new industry called debt settlement firms has evolved. I haven't found one that works well, they all are borderline fraudulent. Most bankruptcy attorneys also do debt settlement and the first thing I tell my clients is that it usually doesn't work. Unless you have access to a source of cash quickly, you have no chance. In the 1980's I had great success in settling debts at 25%. Unfortunately, the debt settlement companies have ruined the debt settlement business since they really don't care about getting their clients the lowest deal. All they are about is getting paid about $500/month so they can collect their 18% fee. They keep almost all of the first 6 payments for their fees, then they start putting the future payments in a trust fund to settle debts. Thereafter they might settle one of the small debts. Meanwhile you are getting seriously in default on your debts. At around 6-12 months in default, the remaining creditors start suing you, you have no option now but to file bankruptcy.

Answer Applies to: Colorado
Replied: 9/22/2011

Answer By Marvin Wolf
The Law Office of Marvin Wolf
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There are several differences between debt settlement and bankruptcy. The main difference is that debt discharged in bankruptcy is not generally taxable, while debt forgiven in debt settlement is considered income and if over $600 is forgiven, the creditor issues a 1099 form to you and the IRS, which is considered additional income and subject to taxation. This difference in liability must be factored in when determining which avenue is "cheaper", not just fees. Fees for either approach vary from attorney to attorney and service to service.

Answer Applies to: New Jersey
Replied: 9/21/2011

Bankruptcy Law office of Bill Rubendall
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Debt settlement is usually more expensive that bankruptcy. You might need to pay a lump sum to creditors. In chapter 7 you don't pay creditors anything. In chapter 13 you make monthly payments. Typically, the monthly payment for chapter 13 is less than a debt settlement.

Answer Applies to: California
Replied: 9/21/2011

Answer By Janet Lawson
Janet A. Lawson Bankruptcy Attorney
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More often than not it is. And bankruptcy has teeth. No one can sue after you file. That is not true in debt settlement.

Answer Applies to: California
Replied: 9/21/2011

Mercado & Hartung, PLLC
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Filing a BK gets rid of your unsecured debt but has it's repercussions. DS is a form of paying off your debt either in lump sums or payment plans.

Answer Applies to: Washington
Replied: 9/21/2011

Law Office of John C. Farrell, Jr.
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The choice between bankruptcy and debt settlement is a personal choice. There are risks and negative effects for each one. Debt Settlement is similar to filing of Chapter 13 with respect to paying back your creditors an amount less than what is owed. I have heard some people refer to it as "informal bankruptcy". I would suggest speaking to a bankruptcy attorney and a law firm which deals with debt settlement to way your options.

Answer Applies to: Massachusetts
Replied: 9/21/2011

Answer By Darren Aronow
The Law Office of Darren Aronow, PC
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It is generally less expensive to file a chapter 7 bankruptcy then to settle debt. But often the biggest factor is that in debt settlement you will receive a 1099 for the settled debt as if it was income which may bring high tax consequences in the following tax year. In bankruptcy, the debt is simply wiped out. For example, if you have $20,000 in credit card debt that you settle for $10,000, you will receive a 1099 for $10,000. So besides the cost of settling the debt, you may have tax consequences as well.

Answer Applies to: New York
Replied: 9/21/2011

Ashman Law Office
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A large percentage of "debt settlement" companies are scams. Don't fall for them. See a qualified bankruptcy lawyer to look at your real options.

Answer Applies to: Georgia
Replied: 9/20/2011

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