Daniel Martin | May 01, 2023
Summary: In Arkansas, creditors can garnish up to 25% of your disposable earnings if they win a debt lawsuit against you. SoloSuit can help you protect yourself.
Summary: Bankruptcy and debt settlement will both have a negative impact on your credit score, but depending on your financial situation, one option may be better than the other. Working out a debt settlement plan on your own can help you save money and protect your credit. SoloSettle helps make the debt settlement process simple.
Having a good credit score is essential. Consumers with a good credit score have a better chance of being approved for the best mortgage, auto loan rates, and credit card offers and rewards. Having a good credit score could mean a difference of several thousand dollars in savings over time.
Bankruptcy will greatly affect your credit score, as it is a worse-case scenario and stays on your credit report for up to 10 years. Debt settlement, on the other hand, can remain on your credit report for up to 7 years, which is less damaging than bankruptcy.
So, if you find yourself struggling with debts piling up, debt settlement could be the ideal option to help you resolve debt with the smallest effect on your credit score. Ultimately, choosing between debt settlement and bankruptcy depends on your current financial situation and the type of debt you have outstanding.
Below, we’ll dive deep into both options and their potential effects on your credit score.
It depends on your current situation.
If your credit score is good—hovering around 700 or higher—but you still find yourself filing for bankruptcy, be aware that your score will take a hit. In contrast, if you have poor credit (less than 500), your credit score will likely increase after filing for bankruptcy.
Bankruptcy can have a devastating effect on your credit score and may linger on your report for up to a decade, but there is still hope! By challenging errors or inaccuracies on your credit report, you can improve your score and have them removed. Filing FCRA disputes can give you the power you need to take back control of your financial future.
When filing bankruptcy, you get a credit report that tells you where your financial standing will be after 12 months. Though the numbers can vary greatly, your credit score will typically drop to the 600s. From there, you can take action and start working on rebuilding your credit.
Most consumers can qualify for a home loan approximately two years after filing for Chapter 7 bankruptcy or immediately after completing a Chapter 13 plan, and they can obtain auto loans immediately.
Chapter 7 and Chapter 13 bankruptcy are two forms of bankruptcy relief available to individuals in the United States. Chapter 7 provides the most extensive form of debt relief. It involves a liquidation of all assets and results in the discharge of most debts.
Chapter 13 involves a restructuring of debts that allows individuals to keep their property while repaying their creditors over time.
Both forms of bankruptcy afford individuals the opportunity to start anew and reduce the financial burden of overwhelming debts. They also enhance an individual's credit standing by reducing collection activities and preventing additional late payment charges.
Additionally, the automatic stay that is issued when bankruptcy is filed gives individuals protection from creditor harassment and repossession activities.
The following tables further outline the pros and cons of both Chapter 7 and Chapter 13 bankruptcy.
|The ability to discharge unsecured debts like medical bills, credit card debt, and personal loans, and stop creditor harassment.||Chapter 7 is likely to be much more expensive than Chapter 13 bankruptcy. This is due to the more complicated nature of the process, including court filing fees, legal fees and other costs associated with the disposal of assets|
|A fresh start with your finances without the burden of worrying about repaying outstanding debts.||Any accounts that are included in the bankruptcy are reported as closed and discharged, and a Chapter 7 bankruptcy will remain on your credit report for up to ten years.|
|The opportunity to keep certain kinds of property, such as your home and car, while still discharging many other debts.||If you have significant assets, you may have to surrender them as part of your bankruptcy filing. This may include cars, jewelry, property and other valuables.|
|Damage to your credit report..|
|Chapter 13 Bankruptcy provides immediate relief from creditor calls and other collection attempts, giving you a more “breathing room” financially.||You must make regular payments for 3 to 5 years; if one payment is missed, the court can dismiss your case and you may have to pay back all of your debt.|
|A Chapter 13 allows you to catch up on delinquent payments, such as missed mortgage and car payments, over a three- or five-year time period.||Your credit score will be negatively impacted for at least seven years.|
|Through a Chapter 13 Bankruptcy, you have the opportunity to reduce or eliminate secured debt, such as a vehicle loan or mortgage, along with some types of unsecured debt, such as credit cards and medical bills.||You may not be able to discharge certain debts in a Chapter 13 bankruptcy, such as any tax liabilities, child support or alimony, or student loan debt.|
No. Filing for bankruptcy can have a serious impact on your credit score, so before making any decisions, it's important to first consider all the alternatives.
The best way to begin is to contact a credit counseling service. They can help you understand your options and give you guidance on how to manage debt. There may be other remedies for improving your credit score, like talking to creditors about a payment plan, asking for a lower interest rate, or decreasing debt by consolidating your loans.
Bankruptcy should only be considered as a last resort, so make sure to carefully weigh your options before making the decision to file.
For example, debt settlement may be a better option for you to resolve your outstanding debts with the smallest damage to your credit score. Keep reading to learn more.
The simple answer is yes. It may take longer for your credit to recover after debt settlement than after bankruptcy, despite what a national debt consolidation or settlement company may have told you. This is because, in most cases, you need to be delinquent to negotiate a good settlement with your creditor.
Debts that have been paid on time or with minimum payments for an extended period (typically at least six months) are charged off and transferred to third-party debt collectors, with whom you may be able to negotiate more favorable settlement terms. In some cases, debts can be forgiven for up to half their original amount, depending on the type and age of the debt. You may have to pay taxes on forgiven debts over a certain amount, too.
You will have at least six months of delinquencies reporting on your credit by the time you settle the debt, and these will not be removed. Reporting and late payments can remain on your credit for up to 7 years after the settlement payment was made, and the settled account will likely be updated to settle for less than the full balance.
Even if missed payments already damaged your credit scores before you sought debt settlement, making payments on charged-off debt can further reduce your scores and cause the debts to report for a longer period of time, seven years from the date of payment.
The Consumer Financial Protection Bureau (CFPB) warns that debt settlement can leave you with more debt than when you started, even though it may seem like the best option at the given time. This is a sobering realization.
The most difficult challenge is getting one or more creditors to settle for less than they are owed. Although creditors are not required to negotiate a settlement, many will do so if you can prove that you’re not able to pay and likely to seek bankruptcy protection as a result. If that occurs, they will get very little, if anything at all.
Debt settlement can be handled in two ways: with the help of a third-party company or by the individual. Working with a debt settlement agency can help you save time and effort compared to going through negotiations on your own.
However, the CFPB also warns that working with debt settlement companies can be risky. The CFPB reports many instances of debt settlement scams that take advantage of consumers and leave them high and dry. This is why handling your debt settlement on your own may be the best move.
If you want to settle your debts on your own, you need to know as much as possible about each debt, create a budget that considers your current financial situation, and negotiate a reasonable repayment plan that your creditors or collectors will accept in writing.
To learn more about how to settle a debt on your own, check out the following video:
Now, let’s consider some of the basic pros and cons of debt settlement.
|Debt settlement plans can be negotiated with the help of free credit counseling.||There is no assurance that creditors will be willing to negotiate with you.|
|You only pay part of what you owe.||Your credit score will be negatively impacted for at least seven years.|
|A debt settlement company can help you negotiate with creditors so that you don't have to file for bankruptcy or pay massive fees.||Late-fee penalties and accrued interest will increase the size of your debt if you stop making payments to save for a "lump-sum" offer.||State and federal tax authorities will treat the forgiven amount as income and require you to pay taxes on it if you settle a debt.|
When it comes to improving your credit score, the decision between bankruptcy and debt settlement can be a difficult one. Both have pros and cons depending on your financial situation.
Ultimately, however, it's up to you to decide which option is best suited for your particular needs. Whichever path you choose, be sure to budget carefully, stay informed of all options available to you, and remember that there can be life after debt.
If you find yourself face-to-face with aggressive debt collectors, SoloSuit can help you stand up for your rights and fight back in court.
SoloSuit makes it easy to fight debt collectors.
You can use SoloSuit to respond to a debt lawsuit, to send letters to collectors, and even to settle a debt.
SoloSuit's Answer service is a step-by-step web-app that asks you all the necessary questions to complete your Answer. Upon completion, we'll have an attorney review your document and we'll file it for you.
Here's a list of guides for other states.
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