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Debt relief dilemma: Is bankruptcy or debt settlement best for your client?

As more and more experienced bankruptcy attorney with years and even decades of practice in helping out critically debt-ridden clients from legal insolvency face the same old cliched question – ‘should I opt for bankruptcy or debt settlement‘, the fact remains the same – ‘what financial condition he/she is in’.

In other words, if you ask for the best solution, i.e., whether debt settlement or bankruptcy should be your best choice to resolve your debt problems, then the most suitable reply to that would be – it depends on your current financial health.

When to opt for Chapter 7 bankruptcy

Some specific income guidelines must be complied with so as to get eligible for Chapter 7 bankruptcy protection. However, if you get qualified for it and receive full relief from your debt obligations (also known as a legal discharge), then this route would be the most appealing one for you as far as debt solution is concerned.

If all this while, you’ve been studying about Chapter 7 bankruptcy, then it is very likely for you to be aware of that even if you don’t qualify for it due to your income, still you have the chance to take advantage of it through a so-called means test.

Actually, to qualify for Chapter 7 bankruptcy, your monthly earnings should comply with the pre-scheduled income charts as followed by the bankruptcy courts to discharge a legally insolvent person like you from his/her debts. So, here you’d require a seasoned bankruptcy attorney who can find out whether or not you are eligible to file for Chapter 7 discharge.

It must be noted that taking advantage of Chapter 7 bankruptcy doesn’t imply that you’d lose all of your assets or belongings, as popularly conceived. The reality is that you can keep several of your assets or belongings, even if you’ve filed Chapter 7 bankruptcy under the state provisions known as property exemption, provided you don’t own excessive amount of them.

When to opt for Debt settlement

When a debt negotiator arranges for a settlement, then he/she would normally do so only if you aren’t eligible for legal discharge under Chapter 7 bankruptcy and that you might have to repay more as compared to what is required in debt settlement. The same goes with Chapter 13 bankruptcy, in case you opt for that instead. Often debtors such as you get lucky to have their outstanding loan balances slashed by almost 40-60 percent and settle their total debt for pennies on the dollar.

However, having your debts settled doesn’t come without its shortcomings. A lot of creditors agreeing to your settlement offer would have you to pay them back in a lump-sum amount so as to reduce your debt burden by more or less 40-60 percent as already discussed above.

Additionally, in a debt settlement program, you’ll be issued with a 1099 for the debt amount that has been written off by your creditors. This is known as debt forgiveness and is considered as a taxable income by the Internal Revenue Service or the IRS. This mainly happens when the total assets you own exceeds that of your forgiven debt amount.

Take for instance, in case of a 1099 form being issued to you due to a forgiven debt amount of $18,000 and that the overall assets owned by you is more than your financial obligations by about $8,000, then you’d be held liable to report that $8,000 of your savings as income in your annual tax return and pay your tax accordingly.

Your retirement plan will be considered as an asset during debt settlement, but the same is exempt under bankruptcy, nevertheless. So, if you’re contemplating whether to file bankruptcy or opt for debt settlement, then consulting an attorney who has experience in both the debt relief processes would certainly help you to clear up your queries as well as doubts, and come out with the most apt financial solution at the end of it all.