Many people find bankruptcy to be a daunting last-ditch effort to help a stressful financial situation. They do everything in their power to find alternatives that may not even end up helping them achieve their goal of financial freedom. Debt negotiation is one of the most popular forms of debt relief aside from bankruptcy, but many people aren’t aware of the potential negative outcomes of pursuing it.
Understanding Debt Negotiation
Debt negotiation is the process of communicating with creditors to come to an agreement on a lowered debt amount. Though this may not completely eliminate debts, it does provide an opportunity to lower the amount owed without going through the bankruptcy process. There are usually two different scenarios in which debt negotiation can be most effective:
- When you are able to settle your debt for a deep discount, which is rare, but possible
- If you are unable to qualify for bankruptcy or have too little debt for bankruptcy to make sense
There are, however, several issues to consider in evaluating whether this method of debt resolution is right for you. First, there is no guarantee that all of your creditors will work with you. What if some do and others don’t, and those that refuse still pursue a lawsuit against you? If some or all creditors choose not to work with you or reject what you have to offer, it may simply end up being a waste of both your time and your resources, resources which are no doubt very scarce. This leaves you with even less time and money to pay your debts, with no visible way forward. We have represented many clients in successful debt negotiation and there are times when it is the right solution, but you need to know that debt negotiation lacks certainty, and you need an experienced professional to guide you. Bankruptcy, however, brings you certainty of outcome.
A second issue that can present itself when pursuing debt negotiation actually occurs when the negotiations are successful. The creditor will usually issue a Form 1099-C to you (basically miscellaneous income)as the forgiven debt is considered “income” to you, which you may have to pay tax on. This also does not happen in bankruptcy.
Thirdly, almost all effective debt negotiation settlements require a lump sum of cash which may be difficult or impossible to come up with.
And finally, contrary to popular belief, debt negotiation will indeed affect your credit rating.
While debt negotiation has the ability to provide partial debt relief, bankruptcy has the ability to permanently eliminate large amounts of debt. There are two main types of bankruptcy available to consumers:
- Chapter 7 bankruptcies offer a discharge of several types of secured debts through the liquidation of non-exempt property. The process can take anywhere from 2-4 months, and the debt discharged by its completion is eliminated permanently.
- Chapter 13 bankruptcies utilize a payment plan established by the court to reorganize your debts. These payments are made during a 3-5 year period, and often end up being smaller than the filer’s original payments. This chapter also has the possibility of granting a partial discharge, all without forfeiting any property.
Contact Our California Bankruptcy Team Today
We understand that finding the best solution to a stressful financial situation can be difficult and confusing. We are committed to helping you find your best way forward to finally achieve the financial independence you deserve.
If you would like to find out more about how we can help you, don’t hesitate to get in touch with us today through our website or give us a call at (310) 220-4147 to schedule a consultation.