Bankruptcy
Chapter 7 allows you to discharge most of your debt, but you will have to liquidate most of your assets. With Chapter 13 you get to keep your assets, but pay your creditors over a 3-5 year period.
Pros
- Stops collection activity
- Retain assets (Ch 13)
- Significant debt relief (Ch 7)
Cons
- Reduces credit score
- May do not qualify for Ch 7
- Affordability
Debt Settlement
Debt settlement professionals negotiate with creditors on your behalf. Because of the amount of debt they control, debt settlement companies can negotiate better settlements than individuals.
Pros
- Hiring a professional
- Moderate debt relief
- Decrease in monthly payments
Cons
- Collection process continues
- Reduction in credit score
- Lump sum settlements
Credit Counseling
Credit counseling companies can negotiate lower interest rates and monthly payments with your creditors. Debt relief comes in the form of reduced interest rates and an accelerated pay off period.
Pros
- Lower interest rates and payments
- Stops collection activities
- Doesn't affect credit score
Cons
- Pay back 100% of debt
- Some debts not included
- May limit access to new credit
Debt Consolidation
Pay off multiple debts with a single debt consolidation loan. These loans can be unsecured (such as a signature loan) or secured (such as a home equity loan).
Pros
- Pay a single creditor
- Lower interest rates
- Doesn't affect credit score
Cons
- Can convert unsecured debt to secured
- Introductory offers are temporary
- Potentially higher interest rates
Debt Restructure
Debt restructure programs allow you to purchase your qualifying debt back for about 40 cents on the dollar and pay it back over a period of 2-4 years.
Pros
- Significant debt relief
- No lump sum settlement needed
- Collection activities stop
Cons
- Not all debt qualifies
- Relatively new service
- May affect your credit score
Tax Relief
These companies are similar to debt settlement companies, but they only deal with one creditor—the IRS. They will help you settle your taxes for less than you owe and get on with your life.
Pros
- Stop IRS harassment
- Remove penalties and interest
- Settle you tax debt
Cons
- Affordability
- May not qualify for settlement
- IRS is tough to deal with
- Bankruptcy
- Debt Settlement
- Credit Counseling
- Debt Consolidation
- Debt Restructure
- Tax Relief
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FAQ
Debt Settlement
- I received a 1099-C from the credit card company saying that my debt of $10,123.00 has been forgiven. The forgiven part is great, but do I have to pay tax on that amount now?
- Unfortunately, any amount of debt that is forgiven is considered "income" and you may receive a 1099 at the end of the year indicating that the creditor has notified the IRS. Under certain circumstances, filing IRS Form 982, could allow you to reduce or exclude this amount. Consult a tax professional for more information.
- Do I have to pay taxes on a debt settlement?
- The difference between what you owe and what you settle an account for is considered income by the IRS. It is the responsibility of the creditor to notify the IRS and send you a 1099 form. If you don't receive one, the IRS probably hasn't been notified. If you do, they probably have. In our experience less than 20% of individuals receive 1099 after a settlement.
- Shouldn't I hire a professional to negotiate a settlement for me?
- The benefits of hiring a professional negotiator is that they are—well—professionals. Many of the larger settlement companies can also negotiate better terms than individuals due to the large amount of debt they control. Speak with an accredited negotiation professional and check out our tutorial on DIY Debt Settlement before you make a decision.
- I want to settle with my credit card company. What do I want to ask them to report to the credit bureaus?
- You can ask them to delete the tradeline altogether, or update the record to state "paid as agreed". Note that if you are settling with a debt collector they may or may not be able to update the original creditor's tradeline. Always ask.