Is a Debt Settlement Program a Viable Bankruptcy Alternative?

A debt settlement program could offer a bankruptcy alternative for those who are struggling with unmanageable personal debt. There are several debt solutions that can help to ease the pressure of financial difficulties so exploring the benefits of each forms an important part of the selection process. Invest time at an early stage to make sure that you choose the right option in order to prevent additional problems and the accrual of further costs.

What is a Debt Settlement Program

An intermediary (the debt management company) will negotiate with creditors in order to reach a deal that will write-off up to 50% of unsecured debt (credit cards, medical bills etc). This bankruptcy alternative involves making a payment to creditors for a period of 12 to 36 months. At the end of this term, any remaining debt is cleared so you will now be debt-free. Unlike personal bankruptcy, the matter will not be made public.

A Bankruptcy Alternative

Whilst you can become debt-free under chapter 7 in as little as 4 to 6 months, not everyone qualifies under the 2005 bankruptcy laws. The most common reasons for not qualifying include an income that is above the state median and non-exempt assets (a second home, valuable collection etc). This will mean having to file for bankruptcy under chapter 13 which would involve a monthly payment for a 3 to 5 year period. A debt management program may allow you to become debt-free sooner without the associated stigma.

Debt Settlement Program Fees and Charges

Cowboys exist in every industry and debt solution providers are certainly no exception to the rule. Check with the Better Business Bureau to make sure that the provider has a good reputation and avoid an intermediary that front-loads any fees (charges them up-front). Payment should be taken each month in order to prevent the likelihood of creditor litigation and the debt actually increasing in the short to medium term. Provided that you are able to offer an affordable monthly payment to your creditors, this debt solution could offer a more satisfactory resolution to your financial difficulties.

Credit Scores

Filing under chapter 7 will show on your credit report for a period of 10 years; this will make it very difficult to borrow money or secure the best mortgage refinancing deal. Both debt settlement plans and chapter 13 bankruptcy affects your FICO score for 7 years. Continuing to make repayments on other credit agreements could mean that your credit score will start to improve in a couple of years.

Whilst a debt settlement program could be the right bankruptcy alternative, no single debt solution is right for every person. It is important to explore all available options in order to prevent costly and time consuming mistakes further down-the-line.

Relevant Articles:
How to Choose a Debt Settlement Company
How Does a Debt Settlement Plan Affect Your Credit Score
Pros and Cons of Debt Settlement Plans
Do Debt Settlement Programs Reduce Credit Card Debt?
Debt Settlement Help Means Completely Legal Credit Card Debt Elimination

Disclaimer: This article in no way attempts to provide legal, financial or tax advice. One should consult a licensed attorney, tax advisor, or other qualified financial professional before proceeding.