Thursday, August 23, 2012

How Debt Settlement Programs And Chapter 13 Bankruptcy Differ

When the pressure of debt gets too much to handle effectively, there are solutions out there. The only real question is which to choose. The best options are constructive repayment agreements, and the two most common are debt settlement programs and a bankruptcy agreement under the terms of Chapter 13.

The two are quite similar in principle, with their core reasons being to facilitate the repayments of debts, either in full or in part. The result is to lift the burden of debt off the debtor. But which is the best option to choose? Is a Chapter 13 bankruptcy plan going to damage a credit reputation? Or is a settlement program the right way forward?

These are just some of the issues to consider, and while old bankruptcy options were taken advantage of, creditors are now better protected. Clearing debts effectively comes down to two key choices, both of which can see debts cleared with just 30% to 50% of the sum repaid, to so which is actually better?

Debt Settlement

There are some great advantages to adopting a debt settlement program to ease the financial burden, not least the fact that what is paid to clear the debt is lowered. But when compared to the alternative bankruptcy, there are some negatives. For example, settlement is more expensive, costing up to ,000 in service fees.

The greater expense comes down to the fact that debt settlement companies charge a fee based on the size of the debt involved, so a larger debt will mean a higher fee. Chapter 13 bankruptcy is a fixed rate. Also, the term of a settlement is usually 3-4 years, which means payments can be larger.

But perhaps the biggest negative is that the creditor is in control when it comes to negotiations. This is because the agreement is a voluntary agreement, so the debtor has every right to reject proposals. Sometimes clearing debts effectively means holding out for better terms, but the creditor car pull the plug at any time and seek legal action instead.

Chapter 13 Bankruptcy

When it comes to fees, bankruptcy is actually a lot less expensive than a debt settlement program. The reason is partly down to the fact that practically no negotiations are needed, just to have the necessary paperwork prepared and legal representation. So, expect costs of between ,500 and ,000.

The term of a Chapter 13 bankruptcy agreement has recently been extended to a maximum of 5 years, so the task of clearing debts constructively is greatly improved. Principally, the monthly repayments are lowered thanks to the longer term.

With a court taking on the case, neither party can act independently. So, creditors cannot take legal action once the Chapter 13 process has begun. For the most part, the plan leading to clearing debts effectively, and once the final ruling is made, it cannot be repealed.

The After Effects

But how does the eventual ruling actually affect the debtor? Through a debt settlement program, the creditor will get at least a share of the money owed to them. However, the credit record will state that the debt was paid through a settlement plan and the credit score will be lowered significantly. The good news is that credit worthiness can be regained after just 2 years.

With a Chapter 13 bankruptcy plan, the decision goes on the credit report and stays there for as long as 10 years, severely damaging the credit score. Also, when any bankruptcy ruling is made, the records are made available publicly, so people have access to relevant records. So, clearing debts effectively can have its price.

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