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Posted by on Jul 25, 2014 in Personal Finance | 0 comments

Bankruptcy or Debt Negotiation?

The US Bankruptcy Code Law provides individuals and businesses with legal solutions that will save them from overwhelming debts to enable them to regain financial control and stability. Parts of the solution involve discharge of all unsecured debts and an affordable means of paying secured (usually government-related) debts.

Municipalities, corporations, and millions of Americans in financial crisis, have, over the past years, resorted to filing bankruptcy due to the many advantages and benefits it offers. Based on the amount of their loans and economic situation (considering their income, assets and properties), they can choose which chapter of the bankruptcy code would be most appropriate for them.

These chapters include: Chapter 7, also known as liquidation of assets; Chapter 11, or business reorganization; Chapter 12, which is designed for families in the farming or fishing business; and, Chapter 13, which is payment of debt via a three-year, more affordable, payment plan.

Besides the discharge of unsecured debts (such as from credit card companies) or reorganization for a more affordable debt-payment scheme, there is also the “automatic stay,” which is another major benefit of filing for bankruptcy. This benefit specifically stops repossession of properties, foreclosures, evictions, utility shut-offs, and any attempt by creditors or collecting agencies to sue debtors and force the sale of their personal property or garnish their bank account.

A good business lawyer, however, would not immediately recommend the filing of bankruptcy to a client without first discussing with him/her its advantages and disadvantages. For while bankruptcy may discharge a client from unsecured debts and enable the payment of secured loans, it can also mean loss of some properties, closure of business, a bankruptcy stigma that will remain on one’s credit report for 10 years, and possible higher interest rates on future credits.

The website of Ryan J. Ruehle, LLC, shares an article which gives clients another debt-payment option that is more manageable than what bankruptcy chapters offer. This is debt negotiation which, as the article explains, can reduce interest payments, lengthen the time span of payment, defer interest payments, or consolidate loan payments.

A debt negotiation scheme can reduce the loan to even more than half of the total amount, giving the debtor a much smaller amount to settle. Its other advantages include:

  • No more litigation process (which is part of the bankruptcy process)
  • Debt may be paid through a single/lump sum payment or monthly payments
  • Freedom from being harassed by debt collectors
  • Freedom from lawsuits and any other legal action that will force sale of properties, wage garnishment or a bank account being levied.

Other may reason out that even debt negotiation would have an effect in one’s credit score. This is true, but the effect is much less substantial than when one files bankruptcy and, to begin with, one’s credit rating will already have been affected negatively after a six-month delinquency in payment – this is even before debt negotiation starts.

Probably, the only one great disadvantage of debt negotiation is payment of taxes if the amount taken away by creditors from the loan exceeds $600. This benefit (or non-benefit for some) is called the cancellation-of-debt (COD) income.

To be more certain about which legal solution a client should opt for (bankruptcy or debt negotiation), it is recommended that the advice and guidance of an expert lawyer is sought. This is to make sure that the best option is chosen and that proper procedures are followed.

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