Debt Relief, Debt Settlement, or and Bankruptcy – How to Choose
There are various reasons you might be confused about which is better, debt settlement or bankruptcy. Debt settlement, debt negotiation, debt consolidation, all seem similar but are very different. It seems very difficult to differentiate between them. Bankruptcy also seems overwhelming. If you are unable to file a chapter 7 bankruptcy, or are trying not to file bankruptcy, maybe you are considering debt settlement. This is not something you do all the time, so it is not familiar. Maybe it would be good to understand them better. Let’s take a look at the differences.
How Debt Relief and Debt Settlement Companies Work
Debt settlement works less than half the time. Debt settlement companies ask you to start paying a monthly payment, and stop paying your creditors. For the first six months or so, the debt settlement company waits for your debt to go delinquent so they can settle. However, during that time, your credit balances jump. This is because there is a “default interest rate” and penalties on your credit cards. This default interest rate is several times higher than your regular rate. The default interest rate is applied when you default on the credit card. The default interest rate could be from 30% to 300%. If you default on the credit, there are late charges and penalties that will be added as well. Therefore, if you stop paying your credit cards for six months, your balance could double or triple. Once your balance has doubled, and is made up mostly of interest, your credit settlement company will ask if the credit card company will settle for half. Of course they will. However, half of a balance that is now twice as big is the same amount you would have paid in the beginning. This means that the debt settlement company got the same deal you could have gotten in the beginning. However, now your credit is wrecked. The default on the credit card will stay on your credit for six years. The amount you pay will be the same as what you would have paid in the beginning. The only value added is that the debt relief company helped you save your money to pay your debts. You still end up paying, and ruining your credit.
How Chapter 7 Bankruptcy Works
Chapter 7 bankruptcy does not make you repay unsecured, non-priority debt. Instead of trying to settle for half of an inflated amount, you simply pay nothing. Chapter 7 bankruptcy works with every creditor, unlike debt settlement who can normally not work deals with title loans, Discover Card, and others. The bankruptcy is over in a few months, instead of years worth of payments that you cannot afford with debt settlement. The worst part is that debt settlement will result in several negative marks on your credit report. Bankruptcy will be a single bad mark on your credit, albeit a public one, but still might look better than several bad marks from debt settlement.
How Chapter 13 Bankruptcy Works
Chapter 13 bankruptcy does not mean you simply repay the debt. In fact, lots of people pay little or no unsecured debt in a chapter 13 bankruptcy plan. There are two different way to determine how much your payments will be in a chapter 13 plan. You either have to pay what you can afford, or pay what you are required to pay for nonexempt assets or nonchargeable debt. Let’s look at the two ways.
How to Figure a Chapter 13 Plan Payment
The amount you repay will be determined in one of two ways. One way to figure out your chapter 13 plan payment is the amount you can afford to repay. This is done by subtracting your expenses from your income. This amount is your Disposable Net Income. If that number is low or negative, your payment will be very low. In fact, the only amount you could have to repay would be court costs and attorney’s fees. Your payment could be only $190 a month for 36 months. At the end of that time, all of the debt that could be discharged in chapter 7 would be discharged in chapter 13. You would not pay any more than you paid in chapter 7. You might even be able to get the benefit of cram down or super discharge. A chapter 13 might be a better option than a chapter 7.
The other way to determine your payment in chapter 13 bankruptcy would be to determine the amount of your unexempt property. In a chapter 7 bankruptcy, the court would sell or settle your unexempt property and give that money to your creditors. Therefore, in chapter 13, the creditors should receive as much as they would get in chapter 7. If this number is zero, you would pay what you can afford as discussed above. If this number is higher than zero, you would pay the higher of what you can afford, or the value of your unexempt property. Let’s take a look at how that works.
How to Estimate Chapter 13 Payment Based on Income
This is an example of an estimated chapter 13 payment. If you have an income of $60,000 a year, you will likely not have any disposable net income. Therefore, your chapter 13 plan payments could only consist of court costs and attorneys fees. Your payments could be about $200 a month for 36 months. At that point, all of the debt that could be discharged in chapter 7 would be discharged in chapter 13. You would owe nothing else, as long as you did not have to pay for nonexempt property.
If you have an income of $90,000 a year and a household of 4, you will also likely have no disposable net income. Your chapter 13 plan payments would normally be about $200 for 36 months. At the end of the payments, all the other debt would be discharged just like in chapter 7, as long as you did not have to pay for nonexempt property.
If you have income of $120,000 a year and a household of 5, you will likely have small disposable net income. The mean income in Arizona for a household of 5 is currently $100,000. You would have about $20,000 of disposable net income, less if you hire a good lawyer. Your plan payments could be about $1850 a month for 60 months. The court can do whatever they like with that money. They will pay themselves, pay your lawyer, and maybe even pay some creditors. Regardless, your payments will be the same. Your debt, whatever is left, will be discharged at the end of your payments.
How to Determine Chapter 13 Payments Based on Nonexempt Property
This is a Chapter 13 Payment example. If you have a rental house with $100,000 in equity. The creditors would have to receive at least $100,000 in a chapter 13. Your payments could be about $1850 a month. However, if you have less than $100,000 in debt at the time of filing, you would only pay the amount of the debt. If you have $100,000 in equity, but your debt is only $80,000, you would only pay the $80,000.
Creditors Do Not Have to Work With Debt Settlement Companies
Debt settlement and debt negotiation companies are private companies. They do not have the power of the United States Federal Court to settle debts. The debt settlement companies are simply begging the creditors for a break. Many creditors, like Discover Card, payday loans, title loans, and many more, simply do not deal with debt negotiation and settlement. So, even if you are lucky enough to complete the debt restructuring, you will still have to pay some creditors in full.
Full Repayment Chapter 13 Bankruptcy Plans
Even in the worst case scenario, you will not repay nearly as much as without a bankruptcy. If your nonexempt assets or your disposable net income are greater than the total amount you owe, you will still only pay the amount you owe on the day of filing. When you file a chapter 13 bankruptcy, all of the interest stops. The credit card company can no longer charge interest, fees, penalties, or anything else that increases the balance after the filing date. This means that the most you could ever pay is the amount owed at the time of filing.
So, What is the Best Debt Solution
Chapter 7 bankruptcy will discharge your debt. You will not have to ruin your credit and still pay your debt. If you are unable to file chapter 7 bankruptcy for some reason, chapter 13 bankruptcy offers a really good alternative. You could pay as little as a couple hundred dollars for 36 months, and still discharge all of the unpaid debt. You get all of the power of the Federal Bankruptcy Court to discharge all of your creditors for a small price.