Chapter 13 vs Debt Settlements; a Re-Match
What is a Debt Settlement?
A Debt Settlement is a non-judicial process whereby you or your representative contact your creditors and ask them to take a settlement.
Chapter 13 bankruptcy is a court process to reorganize your debts over a 3 to 5 year plan of repayment.
In the rest of this post, I will assume that you do owe a lot of money and that you do not qualify for a chapter 7 straight bankruptcy.
Round 1: Chapter 13 Can Also Cut Your Balances
With a chapter 13 you might not even have to pay all your credit cards in full in the first place. You might be able to cut your balances by more than the settlements. On top of that Chapter 13 gives you up to five years to pay them off too.
If you don’t own a lot of property and if your income is too high to file a chapter 7 but not high enough to pay your debts in full, then in your chapter 13 plan you pay your debts whatever you can afford. Take that Debt Settlements!
Of course, you’ll have to ask your attorney how much you can reduce your debts with bankruptcy. Know your options because knowledge is power.
Round 2: No Need for Large Up-Front Cash Pool
To do a debt settlement you have to have access to a large amount of cash. Usually, 40% to 50% of the total balances on your credit cards. That’s got to come from somewhere. Often people pull it from savings, their 401k plan, or other retirement plans. Sometimes you have to borrow it from someone else like your parents or grandparents.
In a chapter 13 you set up a payment plan to pay back your credit cards. You don’t have to liquidate your family heirlooms, cars, trucks, jewelry, wedding rings and 401k plan in order to pay your chapter 13 payment plan. You pay it out of your regular earnings.
Round 3: Attorney’s Fees
Attorney’s fees in debt settlements are determined by the number of accounts settled plus the percentage of the amount saved. If the person doing the offers to settle your debts saves you 50% of a $10,000 credit card, they’re going to charge you from 10 to 20% of the $5000 savings. Plus you’re going to pay a flat amount per account up front usually from $100 to $500 per account.
For instance, if he saves you 70% of a $10,000 account, then the savings is $7,000 and 20% of that is $1400. You’re going to pay $3000 on the account, + $1400 in fees, + you paid a down payment. That’s 38% to 45% of the debt. You could have probably gotten that same deal or better yourself to begin with.
In a chapter 13, it’s $4000 to $5000 to handle all of the debts en masse. So, if you owe a lot of money and have a lot of different accounts to settle, then file a chapter 13.
Round 4: Certainty
In a chapter 13 bankruptcy, you know how much you’re going to pay and for how long.
Debt Settlements can take a long time. You won’t know how long until it’s done. While settling one account here or there, the other accounts might sue you in the mean time too. Uncertainty leads to stress in the home and domestic quarreling.
Round 5: Your Credit Is Toast Either Way
Trading your nest egg of savings away in order to settle your debts for less than full value because you think it will preserve your credit rating is a lie. Don’t believe it.
Round 6: Retirement
If you get to retirement age with a lot less money because you liquidated your retirement savings to pay debts, you’ll kick yourself all the way to the Walmart where you’ll be applying for a door greeter job. Ooohh, Debt Settlements takes a black eye, and the crowd goes wild!
If you borrow against your 401k plan and even if you pay it back, you still lose money. If you borrowed $30,000 and if you pay it back on time at 7% but if you would have earned 10% then you’re going to lose more than $40,000 even if you do pay it back on time. If you end up defaulting on the 401k loan instead of paying it back, you would lose over a Million Dollars.
You realize that your retirement savings is protected in a bankruptcy whether in chapter 13 or chapter 7. You could keep all of your 401k plan’s savings when you file bankruptcy.
Round 7: 401k Loans Cost More Than Chapter 13 Payments
If you “borrow” from your 401k plan in order to pay your credit cards, how much does that cost? If you borrow $30,000 from your 401k plan, what is the 401k loan payment?
ANSWER: Borrowing $30,000 at 7% interest for 60 months at 26 pay periods per year yields a $541 payment per check. That’s over $1100/month. 60 months later you’ve paid back $66,000. This is the real cost of your 401k loan and it’s ugly.
Depending on how much money you owe, your chapter 13 plan payment may very well be lower.
Round 8: You Borrow From Your 401k then Lose Your Job
You’re screwed to put it mildly. Imagine you’ve settled $60,000 with the $30,000 you’ve borrowed from your 401k plan. You’re out of debt, sort of. Except that you’re paying the $30,000 back. If you’re on an 8 year repayment plan at 7% then your payment will be $355/check based on biweekly pay periods. Then you lose your job.
First you’ve taken a humongous hit on the amount of retirement you thought you’d have, and that’s going to be in the hundreds of thousands of dollars, and you’re going to be applying at Walmart.
Second, if you had been in a chapter 13 bankruptcy and lost your job, you’d convert to a chapter 7 and discharge the debt. Your retirement savings would still be preserved and you’d be out of debt. Debts Settlements takes a Right Cross to the Jaw!
Round 9: TAXES
In a chapter 13 bankruptcy, you just pop them into the plan, recent taxes will have to be paid in full, however, while paying those in full, you can also reduce your payments on your credit cards to as little as 0%. (Depending on your circumstances). Older taxes may be lumped in with the credit cards and given as little as a 0% pay out too.
Debt settlements cannot touch this with a 10 foot pole. Debt Settlements gets a body shot and is going down!
Round 10: Rental Property Mortgage Benefits in Chapter 13
Imagine stripping the 2nd and 3rd mortgages off of your rental properties and at the same time, cutting the 1st mortgage down to the value of the property and rewriting the mortgage. Can your purveyor of Debt Settlements do that?
Chapter 13 gives Debt Settlements a rabbit punch on the way down, but the referee misses it! Debt Settlements is down!
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