Times are rough. Financial problems cause stress. The stress causes more problems. Problems pile on problems. What to pay? What to skip? What is happening to the credit rating? How to get back to normal spending habits? Where can you start to come up with a plan? There is a range of solutions, and a lawyer can help you to decide which end of the range is appropriate for you. Chapter 7 bankruptcy is the most drastic. The other end of the spectrum is debt settlement. But what are the differences between these two extremes?
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The first difference between the two solutions is in the effect on your rating. At this point, your credit rating is damaged, and one of your goals is to repair and improve it. The plan that will have the least effect on your credit rating is the debt settlement. Under this plan, you start with some learning sessions so that you can avoid a similar situation in the future. The purpose of the debt settlement plan is to turn a chaotic debt situation into an organized plan to pay it off. In contrast, the Chapter 7 plan consists of erasing as many of the debts as possible. Because creditors do not want to lend money that will not be paid back, they are understandably reluctant to someone who has a history of officially reneging on the agreement. The bankruptcy remains a stigma on your credit record for many years.
The second difference concerns your feelings of self-esteem and pride. When you choose the debt settlement solution, you work with the lawyer and the creditors to agree on how much of the total debt you will pay. Sometimes a large lump sum payment is required. When you have completed this plan, you can take pride in having lived up to at least a part of your obligation. On the other hand, when you go for the Chapter 7 bankruptcy, the plan divides your assets and debts into the categories of assets you can keep, debts you must pay, and debts that disappear. While this plan has its advantages, you will not have a sense of accomplishment. Even in these times, there can be a sense of humiliation and failure attached to declaring bankruptcy.
There is a flip side to the previous point. Sometimes debt settlement is not feasible. If the gap between the level of debt and the ability to pay is too great, bankruptcy is often the best solution. When this is the case, a Chapter 7 bankruptcy can provide the ability to draw a line in the sand and get a fresh start. While a bankruptcy causes long lasting damage to your credit and financial abilities, it can give you the breathing room to reconfigure your personal and financial life. In spite of its drawbacks, it can end you up in a good place at a point in the future.
So before deciding which path to follow in improving your financial situation, consider the options carefully. And, as always, discuss the options with a lawyer.
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