Are You a Good Candidate for Bankruptcy or Debt Negotiation?

Do you struggle with a mountain of debt? Are you behind in your payments? If so, you are not alone. And you have several options to get rid of that debt and get yourself back on a positive financial path. Two of the most common options to deal with this are bankruptcy and debt negotiation. Which is right for you? Here's what you need to know to decide.

How Does Debt Negotiation Work?

Debt negotiation goes by several names, including debt settlement. Its goal is to negotiate with the lender to accept payment of less than you owe, canceling (or, forgiving) the remaining amount. To accomplish this, you generally need a lump sum of money which you can offer the lender. You may be advised to divert payments to a fund which builds up to a sufficient amount to negotiate with. 

How Does Bankruptcy Work?

There are two main routes to personal bankruptcy. Chapter 7 is known as liquidation bankruptcy because it's a one-time liquidation of any eligible assets to pay toward your debt. Qualifying debt which remains after this liquidation is discharged and the case is closed. Chapter 13 includes a repayment plan, which you pay for a period of three or five years. Remaining eligible debts at that point are discharged. 

Who Is a Good Candidate for Negotiation?

Debt negotiation may allow you to pay a fraction of what you owe. If the creditor's only options are to accept 25%, 50%, or 60% the full amount or to risk getting even less through bankruptcy, they may accept your offer. So, the fewer assets you have which could be liquidated, the stronger your negotiation position is outside of bankruptcy. 

Settlement also saves you from having to go through the legal process and spending the extra time to claim bankruptcy. If you want to avoid bankruptcy for these or ethical reasons, negotiation is usually the best route with the lowest cost. 

When you settle a debt, the amount forgiven is potentially taxable income. However, there are exceptions to this which will prevent you from owing taxes on it. One of the most common is that you were insolvent when the debt was forgiven. If you qualify for this or another exception, there is unlikely to be any financial or tax consequence for forgiven debt. 

Who Is a Good Candidate for Bankruptcy?

You need the legal protection of bankruptcy if you're at risk of losing valuable assets to foreclosure, repossession, or garnishment. Bankruptcy comes with an automatic, temporary stay which bans further collections efforts. No other form of debt relief offers this. 

As mentioned, some debtors may end up paying little or nothing to creditors if they file Chapter 7 bankruptcy. Are you one of these? If so, it could be worth your time and effort to claim bankruptcy so as to pay back as little as possible. 

Contrary to what many people think, you don't need to wait until things are catastrophic to claim bankruptcy protection. Maybe you have a lot of debt, but you earn a good income and just need some help getting back on track. Chapter 13 allows you to roll much of your debt — including late payments on your home — into one monthly payment stretched out over several years. You get legal protection while repaying things. 

Where Can You Learn More?

Are you a good candidate for negotiation or bankruptcy? Find out by meeting with McManus & Associates. We'll assess your financial situation, your goals, and your personal interests to help you find the right solutions for your debt challenges. Call today to make an appointment or get answers to your questions.