Everyone's situation is different and one must consider seriously whether filing bankruptcy or trying to settle with credit cards is the right strategy. If the debt is just too high for you to ever get on top of it based upon your income or it will take a long time, bankruptcy is most likely the best option as you will on the road to rebuilding credit quicker than the time it will take to settle the credit card debt. After the holidays alot of new clients come to us with excessive credit card debt from overuse so this is a frequently discussed issue this time of year.
Seeking the advice of a bankruptcy attorney should always be your first step and many firms offer a free consultation.
The Bankruptcy Strategy
A bankruptcy may stay on your credit report for 7 to 10 years depending on the type of bankruptcy filed and may lower your credit score by as much as 250 points. This drop in points on your credit of course depends on how good or bad your credit is now, as many clients coming in to us their credit is already very low so the bankruptcy does not make a significant difference. It is important that you file for bankruptcy as soon as it is clear that you will need to so that you can reduce the damage and rebuild your credit more quickly. Keep in mind that with bankruptcy all of your debts are probably dischargeable under U.S. Bankruptcy Code, with limited exceptions. Moreover, during the bankruptcy you are protected from harassment or interaction of any kind from your creditors.
Debt Settlement As Alternative to Filing Bankruptcy
The best way to settle outstanding credit card debt is with a lump sum. You will obtain the best discount on the outstanding balance by settling in a lump sum. Our firm does not recommend debt settlement companies that direct you to let them pay the credit card companies over time as many of them are scams. If you have the means and the debt is not too high, settling the credit card instead of bankruptcy may be a better alternative as it may have less impact on credit. You of course avoid the cost of an lawyer if you handle yourelf.
Taxes on Settlement of Credit Card Debt
Keep in mind that you still have to pay taxes on the amount settled. As such, if you go $20,000 in credit card debt and you were able to settle for $10,000, $10,000 of your debt is settled and taxable as income. With bankruptcy none of the debt forgiven is taxable.
The best way to handle initially is to consult with a bankruptcy attorney before making a final decision on filing bankruptcy or settling the credit card debt directly with the companies.