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Comparing Savings And Cost Of Debt Settlement And Bankruptcy

by Silvia W. blogger

It is really overwhelming when you are in debt and the situation can be very stressful when you have to find ways to make your monthly payments. In such a situation most of the people look for different debt relief options so as to come out of their debt situations fast and in a more comprehensive way.

There are different debt relief options out there for you to choose from but when you choose you must focus on the opportunity cost. This will determine which the most suitable debt relief option for you is.

·         It is found through different research by the American Fair Credit Council that the debt settlement option on an average will save at least $2.64 for every $1 paid in fees.

·         The report also mentions that more than 95% of the accounts that has been settled receive savings in additional of the fees that the debt settlement companies charge the consumers for rendering their services.

·         In addition to that, the report also states that most of the borrowers who opt for debt settlements often see their first account settled within four to six months of their starting the program.

In fact, the report says that debt settlement allows the consumers to save a lot of money simply due to the reason that it resolves their debts for less than the original balance outstanding. It is actually the best way in which a consumer can get out of debt especially who cannot afford to pay back the full outstanding amount to their creditors.

Debt settlement savings and costs

In order to find out whether or not debt settlement is the cheapest, you will need to consider the savings and cost of it. If you consider the AFCC data once again that is put together by Freedom Debt Relief, you will see that debt settlement is by far the cheapest option as compared to making minimum monthly payments or credit counseling.

However, whether or not debt settlement is actually the least expensive option for you will largely depend on the specifics of your debt as well as your situation. You will need to consider the features of debt settlement for that matter.

Debt settlement which is also called debt adjustment or debt relief is the process of resolving loan accounts that are delinquent debt for a far less amount than you actually owe to the lender.

·         This process involves promises made to the lender to pay a substantial lump sum amount for the total amount outstanding.

·         You as a consumer can settle your own debts or even hire the service of a debt settlement firm to do it for you in exchange of a requisite fee.

·         Depending on the situation, a debt settlement offer can range anywhere between 10% and 50% of the actual amount that you owe to the creditor.

However, it is at the discretion of the creditor to decide whether or not they will accept your offer.

The negotiating power

Typically, it is those consumers who find it difficult to manage their debts enroll in a debt settlement program. This is because of those who are still making payment even sporadic ones typically have a less negotiating power as compared to those who did not make any payments.

This is ironic but it is true that the first step of debt settlement involve stopping making payments to the creditor altogether.

However, credit scores will suffer due to that during a debt settlement process, especially in the beginning. As and when you start to make your payments on the settled debt, your credit scores will automatically recover over time.

Apart from the impact on the credit score, you will also have to consider several other factors to determine the actual cost of debt settlement. These are:

·         When you stop making no payments to your creditors it means that it will accumulate late fees and interest, thereby increasing your balance. It will eventually make harder for you to pay off your debt if you cannot settle it through negotiation.

·         It is also true that there is no guarantee that the lenders will agree to settle your debt after you have incurred such a debt. It is for this reason that the Consumer Financial Protection Bureau cautions the consumers about these accumulated penalties and fees on unsettled debts. This is because these fees and penalties can cancel out the savings you may achieve through debt settlement.

If you involve a third party company for negotiating and settling your debts on your behalf, you will have to pay additional fees that may be calculated as a percentage of the total amount outstanding or the amount you save from debt settlement.

Apart from that, debt settlement may also attract tax costs because as per the Internal Revenue Service norms any amount forgiven by the creditor will be considered as your income and hence taxable.

Bankruptcy savings and costs

Another form of dealing with your unmanageable debt is by filing for bankruptcy. Chapter 7 bankruptcy involves liquidating the nonexempt assets to use the proceeds to repay the creditors. However, there may be a few assets exempted but that may vary by state. However, it includes:

·        Household and personal possessions
·         A vehicle
·         A a certain amount of home equity and
·         Retirement accounts.

As compared to debt settlement, a chapter 7 Bankruptcy can be a faster option in which you can stop collection calls and lawsuits in a legal process in which a debt settlement does guarantee.

However, there are a variety of reasons why chapter 7 Bankruptcy may not be a good option. You will have to surrender the property and you may even have your employment options restricted where your PA unemployment card may not be helpful.

Another significant problem that you may face is the high cost of a bankruptcy attorney which you may not afford at the current situation.

Therefore, to close the discussion it can be said that in order to make the right choice of debt relief option, you will be better off if you take the help of a professional credit counselor. 


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About Silvia W. Advanced   blogger

108 connections, 0 recommendations, 227 honor points.
Joined APSense since, August 18th, 2018, From Los Angeles, United States.

Created on Aug 15th 2019 00:13. Viewed 385 times.

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