As a prominent and experienced bankruptcy attorney in the Denver area, Michael Wink of Wink and Wink P.C. may be partial to encouraging people who find themselves in debt to file for bankruptcy. However, he is not oblivious to the fact that there are other options readily available which promise to alleviate debt as well. In particular, many debtors are under the impression that debt settlement, in which you negotiate with your lender to pay only a portion of your debt in one lump sum, is a smart choice because you don’t have to pay your entire debt. However, explains Wink, the argument of debt settlement versus bankruptcy is ongoing, and very often, he chooses to educate his potential clients on both paths so that they have a clear picture of which option best fits respective fiscal situations.
Why debt settlement may cost you more
When you work with a debt settlement company, many times you are working with a qualified lawyer, Wink says. The issue he has with this, however, is that instead of using your savings to pay off your debt, you’re paying this company to negotiate with lenders, and you still have a substantial portion of the loan to pay off (generally between 40%-80%). Additionally, because the business isn’t closely regulated, you have to be very trusting that the company won’t overcharge you. In many cases, Wink explains, the fees that a debt settlement company charges surpass the cost of filing for bankruptcy.
Furthermore, he says, the debt settlement process can become chaotic and adds an unnecessary amount of tension to an already stressful situation. Once you start negotiations with lenders, everyone seems to want to be paid right away. Suddenly, you have your regular monthly bills coming in, the lenders you have just negotiated with, and the debt settlement company all wanting a piece of what little money you have left. And, because the lenders are already fearful that you won’t pay off your debts, you are much more likely to get sued to recover the outstanding loans, Wink warns. When you file for bankruptcy, on the other hand, you can get all of your debts wiped clean or create a long-term payment plan.
What many people fail to realize as well, he explains, is that debt settlement is considered income. This means that on top of everything else, you are expected to pay taxes on your canceled debt as well. Bankruptcy, however, is not taxable.
How your credit is affected
When you are in debt, there’s really no way that your credit score will escape on the other side of your financial struggle without being negatively affected. However, you do have a role in how far your score plummets. The truth is, says Wink, when it comes to your credit score, the advantages of either option depend on your particular situation. For instance, if you have a steady income but still choose to settle your debts, then your credit score will definitely take a hit, but it may be a softer blow for you if you are able to keep up other payments in the meantime. However, if you already have a pretty poor credit score, then bankruptcy is generally the better option, he says. With debt settlement, your credit score goes down little by little with every bill you miss and every loan you settle. But, with bankruptcy, it’s all in one shot. In fact, Wink adds, after bankruptcy, lenders may look at you as a wiser choice because you now have no debts.
This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Neither publication of this article nor your receipt of this article creates an attorney-client relationship.
