Most people hate the idea of filing for bankruptcy. To them, taking such action is an indication that they have failed financially, and the social stigma attached to them moving forward, they fear, may be more than they can bare. Therefore, many Illinois residents turn to debt settlement options in hopes of avoiding their fears of bankruptcy.
But is debt settlement better than bankruptcy? It really depends on the circumstances. Typically, debt settlement offers are made by companies who have bought the debt from a debt holder, such as a credit card company, who are now seeking to recoup a portion of the debt owed. The amount sought is usually 40 to 50 cents per every dollar of debt owed. This may sound like a great deal, but there may be some serious drawbacks in entering a debt settlement agreement.
First, an individual who fails to make the debt settlement payments may wind up being sued. If a debtor loses that lawsuit, then there may be significant financial ramifications that can make things worse. Second, even if an individual is able to make all of his or her debt settlement payments, any debt that is forgiven at the end of the debt settlement agreement will be treated as income by the IRS. This means that the forgiven amount will taxable, which could leave a debtor with thousands of dollars more in debt to pay off even after fulfilling their debt settlement agreement.
On the other hand, bankruptcy, Chapter 7 bankruptcy in particular, can eliminate many debts in a matter of months. If successful with a bankruptcy filing, a debtor can see the debts erased without any fear that creditors will file a lawsuit against him or her for failing to repay. Although bankruptcy may have a greater impact on one's credit score, it is often a quicker route to reach a fresh financial start.