Even the most conscientious person can find themselves in financial difficulties from time to time. Medical emergencies, the loss of a job or unexpected household expenses can take a person from financial stability to disaster in no time at all. When a person finds themselves in financial difficulty and has no means of digging themselves out, both credit negotiation and bankruptcy are available options for settling debt and getting on with life.
What Is Credit Negotiation?
One choice, credit negotiation, is frequently advertised as a solution to too much debt. In credit negotiation, a deal is arranged with the creditors so that the borrower can reduce the amount they owe. This is generally accomplished by either reducing the balance that is owed, reducing the amount of interest charged or reducing balance and interest. Although the borrower is paying on the debt, they are still in a vulnerable position. Creditors can legally contact the borrower, so there is no guarantee that debt collection attempts will stop.
Credit Card Debt Negotiation Requirements
Credit negotiation requires that the borrower continue to pay on the debt. It is only an option if the borrower has enough income to continue making some payments, even if they are reduced in amount. Credit scores are usually impacted by credit negotiation. By law, creditors are required to report accurate information to the credit bureaus. Because the borrower who entered into credit negotiation isn’t technically following the terms of the original credit agreement, creditors can legally report that the borrower has late payments or is failing to pay the debt. This type of entry on a credit report quickly sends credit scores downward, which can have an impact on the borrower’s ability to get credit in the future.
Cons of Credit Negotiation
The biggest drawback to credit negotiation is that it entails a big risk. Most companies that specialize in credit negotiation charge substantial fees for their services. They make claims of being able to reduce the amount owed to creditors, but sometimes they aren’t able to follow through. If the credit company doesn’t agree to the negotiation, or if it continues to charge late fees for the money that hasn’t been paid off yet, the borrower can end up even further in debt. Creditors can also sue for unpaid debts. If they win the lawsuit, the borrower may end up with garnered wages or a lien on their house.
Bankruptcy as an Alternative
Bankruptcy can be a better option than credit negotiation. If the borrower no longer has the income needed to pay their debts, bankruptcy may be able to wipe out their debts and allow them to make a fresh start. Bankruptcy is also governed by laws that regulate what the creditor can or cannot do, providing some protection for the borrower. Two types of bankruptcy are commonly used for individuals.
Chapter 7 bankruptcy is an option when the borrower meets strict income and asset requirements. It typically wipes out all qualifying debts but remains on the borrower’s credit report for as long as 10 years.
Chapter 13 bankruptcy is an option when the borrower’s income is above the median for their state. It requires paying back some or all of the debt, often without interest, within three to five years. It can remain on the borrower’s credit report for up to 10 years but sometimes comes off at seven years. Because the qualifications for each type of bankruptcy are complicated and vary by state, it is important to contact a bankruptcy attorney to determine which type of bankruptcy would be the best option.
Benefits of Bankruptcy
Although bankruptcy can be complicated, it has several benefits. Creditors are prohibited from contacting the borrower, so harassing collection calls will stop. The burden of debt is reduced or lifted completely, allowing the borrower to begin rebuilding their life. Depending on the type of bankruptcy, the debts can be settled in as short as six months for Chapter 7 bankruptcy and no more than five years for Chapter 13 bankruptcy. Because bankruptcy is a legal agreement, it requires much less risk than credit negotiation.
If bankruptcy is a possibility, the best thing to do is contact a bankruptcy attorney to discuss all available options. Bankruptcy can be a complicated process, and the expertise of an experienced bankruptcy attorney will make it go more smoothly and ensure that the best possible outcome is reached.
Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.
