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Debt settlement can be an effective way to get rid of debts you cannot afford to pay. However, there are pros and cons to the various debt settlement strategies. Our New Bedford bankruptcy lawyer discusses what you need to know about negotiating with creditors in this blog.
What Is Debt Settlement?
Debt settlements involve negotiating with creditors to pay less than the total amount you owe for a debt. The creditors agree to discharge the remaining balance in exchange for a lump sum payment or a structured settlement.
Why would creditors agree to accept less than you owe? The argument is that the creditors would receive more through debt settlement than if you filed a Chapter 7 or Chapter 13 bankruptcy case.
Debt Settlement Strategies – Pros and Cons of Settling Your Debts Through Negotiating With Creditors
There are several benefits of debt settlement versus other debt-relief options. The benefits of debt settlement include:
- Get rid of debts for a fraction of what you owe
- Avoid bankruptcy on your credit report
- Pay off debts in less time
- Only one debt payment a month instead of several payments to keep up with, if you work with a debt settlement company
- Reduce interest on debts
However, there are some drawbacks to using debt settlement strategies. Disadvantages of debt settlement can include:
- Creditors are not required to negotiate
- You could still be sued if the creditor decides they do not want to accept parties payments
- Debt settlement fees can be costly if you work with some debt settlement companies
- Creditors may continue to report negative information to the credit reporting agencies, including charge-offs of remaining balances
- You may owe taxes on the amount of the debt reduction by each creditor
While you can negotiate a debt settlement directly with your creditors, working with a debt settlement lawyer can be beneficial. Creditors may work with an attorney in good faith because they understand the attorney could advise you to file for bankruptcy if you cannot settle with your creditors.
Additionally, an attorney protects you from creditors who might use your financial distress to pressure you into a debt settlement agreement that is not in your best interest. A debt settlement lawyer can also deal with debt collection lawsuits, should creditors decide to file lawsuits.
Should I File for Bankruptcy or Negotiate With Creditors to Settle Debts?
Whether filing bankruptcy or debt settlement is best for your situation depends on many factors. For example, the types of debts you owe are a factor. Debt settlement works with unsecured debts, such as medical bills and credit card debts. If you are behind on car loans or mortgage payments, you may need to consider a Chapter 13 bankruptcy case to avoid repossession and foreclosure.
The amount of debt is another factor. If your debt-to-income ratio is high, you may not have sufficient funds to repay the debts. In that case, a Chapter 7 bankruptcy case could be better. Likewise, you must have a source of substantial funds if you negotiate lump sum payments. Using the equity in your home or retirement funds may not be the wisest way to pay off debt, as these assets could be protected in bankruptcy.
Learn More About Bankruptcy and Debt Relief Options From Our New Bedford Bankruptcy Lawyer
Our New Bedford bankruptcy attorney at Logan A. Weinkauf, P.C. reviews your financial situation during a no-obligation consultation. We’ll explain your debt relief options and discuss how each option impacts your current and future finances. Our goal is to help you get rid of debts you cannot pay so you can build a stronger financial future.