Debt settlements and declaring bankruptcy are two common methods of dealing with lack of credit in your bank account. Basically debt settlement means hiring a debt settlement company to negotiate with the creditors the pending debt amount and reach a settlement which is much lower than the initially agreed percentage. On the other hand, individuals can declare bankruptcy in two ways - through Chapter 7 and Chapter 13.
For individuals facing a financial crunch, there are many benefits of filing for Chapter 7 and Chapter 13 bankruptcy. Using Chapter 7 bankruptcy much of your unsecured debts can be discharged. While most of your assets will be used by the courts to repay the creditors, you can start rebuilding your credit afresh. An attorney costs much less when filing for Chapter 7 as the case can be handled for as little as $500.
However, the disadvantages of Chapter 7 are many. To start with your credit record is badly affected and for a minimum of 10 years the bankruptcy is reflected in your account. During this period, it will be difficult to get a new job, apply for a loan, buy a house etc. Every asset that you own can be used to repay the creditors leaving you with almost nothing. Since most assets will be liquidated, this type of bankruptcy is also known as liquidation bankruptcy.
Chapter 13 bankruptcy can be used to repay creditors over a 3-5 year time. Chapter 13 is also known as Wage earner's bankruptcy and can be used if you have an annual income that surpasses your basic needs such as food, shelter, payments of necessary bills etc. Using Chapter 13 lets you keep both your exempt and non-exempt properties while debts that could not be settled under Chapter 7 can be repaid using Chapter 13. Foreclosure can be delayed while the payment time can be extended.
The disadvantages of Chapter 13 are that the bankruptcy will be reflected into your credit report for 7 years. Getting more loans will be difficult and you will have to hold the string of your lifestyle really tight. Moreover not all debts can be discharged under Chapter 13.
In debt settlement, a third-party firm settles the terms of the debt repayment, many times reducing the percentage of interest to be paid. Hiring the right firm is crucial to making debt settlement work to your advantage.
It is true that you get to pay about half of your debt but the fact remains that without liquidating your assets you still have to repay over a period of time. Debt settlements cost more than bankruptcy and it takes about 24 to 48 months to pay off debts. Debt settlement is not a good option if your income doesn’t exceed your basic needs. It should be remembered that debt settlement companies change a substantial fees on processing your case and instead of helping you pay off creditors they can only add to your burden.
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