Four Reasons to Choose Bankruptcy Over Debt Settlement

by: Jonathan Goldsmith Cohen
I often get asked by clients why they should choose bankruptcy over debt settlement. There are four main reasons why bankruptcy makes more sense than settling debt.

1. Bankruptcy is binding on your creditors

Whether you are in a long-term debt settlement plan through a debt settlement company or a settlement agreement with an individual creditor, the creditor reserves the right at any time to change their settlement terms. A creditor can opt out of a settlement agreement and demand the full balance immediately, raise the minimum payment amount to where you cannot afford it every month, and sue you on the total amount owed including the creditor’s legal fees and accrued interest.

Once a bankruptcy is filed, creditors are put in a position where they either have to accept that they are not going to receive any repayment in a Chapter 7 Bankruptcy or some percentage of the amount owed in a Chapter 13 Bankruptcy. The creditors are forced to comply with the terms of your bankruptcy and the jurisdiction of the bankruptcy court.

2. To settle a debt for less than the full amount owed, creditors require immediate lump sum payments 

In order to settle with a creditor for anything less than the total amount owed including all late fees and interest, creditors require immediate lump sum payments. If a creditor agrees to a payment plan, it will be for the full amount owed.

Further, contrary to popular belief, creditors are not happy to just get “something” rather than nothing. All creditors have strict settlement guidelines. Creditors look to settle for at least 30 cents on the dollar. Settlement guidelines become 70 cents on the dollar once a judgment has been entered against you. Once judgment has been entered, the creditor knows that they can levy your bank accounts at any time, garnish your wages, and get a lien against your home and personal property.

3. You have to pay taxes on settled debts. Bankruptcy has no tax consequences

Let’s say that you have a $12,000.00 credit card balance that you settle for $4,000.00. The $8,000.00 that is forgiven by the creditor is considered earned income. You will get a 1099 for $8,000.00 and will have to pay income tax on that amount. There are no tax consequences to filing bankruptcy. Debt that is discharged in bankruptcy does not result in tax liability. In addition, bankruptcy does not get listed on your tax returns.

4. Bankruptcy Works

Bankruptcy is guaranteed to get you a complete discharge (clean slate) on all of your debts in a Chapter 7 Bankruptcy. In a Chapter 13 Bankruptcy, a Chapter 13 Plan provides a binding mechanism for repayment to creditors without accruing interest, late fees, or the risk of bank levies, wage garnishments, lawsuits, or judgments. Debt settlement may settle a few of your debts, but still leave you with outstanding debts and the necessity for a bankruptcy filing. Approximately 65% of my clients tried debt settlement before filing bankruptcy. They drained precious retirement resources to do so, incurred penalties for early withdrawl, and all cases could have kept their retirement funds safe and secure and filed bankruptcy instead.

Contact Us today to come in for a free confidential bankruptcy consultation in our convenient Monmouth County New Jersey location just off of Parkway Exit 109. You will meet with a lawyer whose practice is dedicated exclusively to bankruptcy law. At your consultation he will take the time to explain how bankruptcy works, answer your questions, and go over costs, fees and our affordable payment plans.