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Debt Settlement vs Bankruptcy: Which is the lesser of two evils?

As the hardening of the job market continues and the economic landscape becomes bleaker and bleaker, there may come a time when you have to look at your accumulated debt and make a decision—do I declare bankruptcy or try to pay my creditors?

Bankruptcy is never the option of first resort. We are compelled through our Christian beliefs and our honor to repay those we owe. However, at what point does that financial obligation go from being a debt owed and a drag on our finances, to an outright millstone around our neck? At what point do we say, “Enough!”?

About twelve years ago my friend was faced with a financial dilemma. She chose to use credit cards to tide her and her family through the financial crisis, and over the course of five years, she racked up about $35,000 worth of debt. Granted, it wasn’t the smartest thing she had ever done.

Especially since she was the one in charge of the family checkbook and she didn’t tell her husband what she was doing.

After my friend stopped using her credit cards, she began trying to pay the cards down.  Unfortunately a few late payments on one card had made the interest rates on all the cards go up astronomically. She finally contracted with a consumer counseling agency on a 5-year debt payment program. This program negotiated an interest rate and payment plan with her creditors, one she could live with and still have grocery money at the end of the month.

And then she lost her job. She had to quit making payments until she was once again employed, but by that time none of the credit card companies would accept her back into a repayment program. She began paying 29% interest on everything she owed.

After six years my friend had not only paid the original charges on the cards, but she had paid an additional $18,000 in interest—and still a $16,000 balance remained. At this point, her husband’s forced retirement and her health problems dictated another lifestyle change upon the family, and she didn’t see how she could pay anymore to the banks.

She had to look at several options: another consumer debt repayment program (only available on two of the five accounts), debt settlement, bankruptcy, or simply ignore the debt-collector phone calls and quit paying the notes on the cards. You may find yourself in a similar situation, wondering what the most logical, feasible solution is for your situation. Let’s look at some of the options.

Ignore the phone calls and just quit making payments. Unless you have no significant assets, your debt is unsecured and you don’t mind the midnight, harassing phone calls from creditors, this isn’t a logical solution. It doesn’t matter what the law is, debt-collectors continue to harass and harangue those who owe, and nothing will get rid of them. If you have any assets to speak of, those you owe can still sue you for the balance due.

Enter a consumer debt repayment program. If you feel that you’ll need your credit any time in the near future (especially if you have a spouse and family), if you have a fairly stable job, and you just want to get your finances in order so that if the worst happens, you’re ready for it, then a consumer debt repayment program may be for you, especially if a few late payments have caused your interest rates to soar to 29% and the banks won’t even consider coming off that figure.

Be sure to find the ones licensed in your state and check customer feedback ratings. Check with your state’s attorney general’s office to see if any complaints or lawsuits have been filed against the company. There are plenty of sharks out there waiting to take advantage of you.  Many times the credit card companies themselves have programs to help you repay your debt. Contact your creditor and see if they offer such a program.

Make your repayment plan as short as possible. Becoming self-sufficient is a process, but at the same time, there’s no sense drawing something out longer than necessary.  Calculate a debt-repayment program that also allows you to sock something back into savings every month. You need that money cushion in case some emergency comes about. Debt is what got you into trouble in the first place. Don’t put yourself in a financial situation where you have to rely on debt again, if at all possible.

Consider contracting with a debt settlement company. NO! NO! And let me say again, NO! This is as bad as option number one, because that is essentially what you’re doing. You quit making payments to your creditors and instead, make payments to a settlement company. They will supposedly hold your money in escrow until there’s enough there to make an offer to clean the slate with those creditors. I say supposedly, because this is the biggest scam there is. And if you get cold feet half-way through the process and want to back out? Tough…the money you’ve paid in is theirs. You don’t get it back.

With this option, your creditors still continue to call and harass you. Your credit takes a nose dive, and unlike bankruptcy, there is no clock running when that will drop off your credit report. Any way you look at it, you’re up the creek without a paddle with this option.

The good news is that if you have the means to settle your debt with your creditors, you can make these offers yourself without third party intervention. Say you owe $15,000 to your credit card company. You have the ability to get your hands on $7,500. You can call up your credit card company and make a settlement offer to clear your account. Most will do so for 50 cents on the dollar. Most will NOT do it if you’ve paid on time for the last ten years and haven’t shown any hardship in making the payments. Bad payment history and hardship is usually required to even talk with a credit card company about this option.

And last, but not least, you can declare bankruptcy. It has been seared into our consumer consciousness that this is the worst option there is. The story goes that you will NEVER recover from a bankruptcy, that you are black-listed from getting credit from anyone ever again, and your credit score will be so far in the hole it’ll take 100 years to dig yourself back up to a respectable rating.

Bullhockey.  For some people, this is the ONLY option that makes sense. You’ll need to research bankruptcy law in your state since what you can keep is different from state to state. Usually your house is sacrosanct—they can’t get that. You may find that your credit score is actually better after the ruling than before!

Once you file for bankruptcy, your creditors are forbidden from contacting you at all. There are no harassing phone calls, no calls to the neighbors, friends or family “looking” for you, no threats of bringing Gunthar to the door and breaking your legs to get the money. The whole courtroom process is robotic and not worth breaking a sweat over. Answer a few questions, confirm your name and status, and the whole thing is rubber-stamped by the court. All the proof for your case and the required consumer financial education classes have been pretty much taken care of beforehand through your attorney’s office.

This was the option my friend chose. She broke down one night and confessed everything to her husband, which eventually led to their divorce. She filed for bankruptcy, started a new life, and is more at peace now than ever before. She and her ex-husband are even talking about reconciling.

If you want to put yourself on firmer footing in order to survive further economic meltdown, then getting your financial house in order is of the utmost importance.  If your job is pretty secure and you’re not hurting too badly, then work out a plan—either on your own or through a consumer credit counseling agency— to repay your debt. If your standing is even shakier than that, if you’re constantly getting harassed by creditors, if you’ve suffered a severe financial setback or encountered a health problem that prohibits you from working and can’t see your way to financial stability, then bankruptcy may be a logical option.

Whatever you choose, make a choice now and get started today. Today is the day to prepare for whatever the future may bring.

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