If you are in a position of having to make some very difficult decisions regarding your debt load, you may be caught in the debt settlement debate and not know who or what is right regarding whether debt settlement is a viable strategy or a scam resulting in high fees, ruined credit scores and increased tax liabilities. Frankly, it can be very confusing with credible arguments and credible financial authorities on both sides of the argument.
You should know that doing something other than paying your debts before or when they are due is most likely going to affect your credit rating. The question to ask your self is: "What debt reduction strategy will result in the highest benefit with the lowest cost and least amount of damage to your credit reports?" Some would argue that bankruptcy is the highest cost to pay because it is the most damaging to your credit score and will cost you thousands upon thousands of dollars of increased interest costs and fees in the future - if you can get credit. Others would argue that even though bankruptcy can mar your credit report for years you are given a "clean" start and you can rebuild your credit without the burden of paying off or settling past debts.
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So the idea of debt settlement is to be able to substantially reduce the principle amount of debt owed by paying off creditors with a "take it or you may get nothing if I declare bankruptcy" offer that is a small percentage of the balance owed to the creditor. This has worked well for some debtors working with professionals (many times law firms specializing in this service) or even by doing it themselves. The challenge is having or accumulating the funds to make these lump-sum settlement offers to creditors. Sometimes this means accumulating money in a settlement account rather than paying creditors what is owed to them every month. This can and usually means collection calls, lawsuits and damaged credit during the accumulation period, not to mention potentially high fees if a debt settlement firm is hired. This can be a very painful period that sometimes lasts months and months. Oh, and guess what? The tax man may come calling, telling you that you owe taxes on the debt your creditors wrote off. Some argue, rightfully so, that bankruptcy has much less "pain for the gain".
So who should consider debt settlement? My opinion is this strategy is best suited for debtors that absolutely cannot restructure their debt to make it affordable to payoff and bankruptcy is not an option. Also when most of the problem debt is credit card or other consumer unsecured debt. When is bankruptcy not an option? Well when there are substantially valuable or valued assets that would be lost in bankruptcy. Only an experienced and qualified bankruptcy attorney in your state can help you determine if valuable assets on your balance sheet are at risk with a bankruptcy filing. Lastly, bankruptcy is sometimes ruled out for non-financial reasons. Some people find the idea of bankruptcy reprehensible on moral grounds.
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