Settling Debts vs. Filing Bankruptcy

What Option is Best for You?

by Natasha Meruelo, Esq.

A lot of clients come into my office and ask about whether debt settlement or bankruptcy are best for them. In my opinion, if you are eligible for bankruptcy, bankruptcy is a much better option most of the time. Let me explain why.

If you qualify for Chapter 7 bankruptcy and your assets can be protected, you generally do not have to pay back any of your debt. There are exceptions for tax debts already owed and other priority debts like child support or alimony however credit cards almost never have to be paid back. If you are eligible for this option another benefit of discharging your debt in bankruptcy is that you will not have any income tax consequences. This is because any debts discharged in bankruptcy are excluded from your gross income according to IRS' own rules. In comparison, any debts you settle or which a creditor voluntarily chooses not to collect may cause you to receive a 1099-c and you may have to pay income taxes on any amount in excess of $600 which you were forgiven or did not have to pay. This is known as cancellation of debt income. So, unfortunately, if you choose to settle your debts for less than you owe, you may end up owing the government taxes.

If it turns out you are only eligible to file Chapter 13 bankruptcy, this is often still a much better alternative to settling debts. Just like in Chapter 7 bankruptcy, you do not have the taxable income problem if you receive a discharge. Your money and payments also go further in Chapter 13. This is because generally speaking, you pay your unsecured debts back at 0% interest and often for just pennies on the dollar. If you must pay secured debts in your Chapter 13, then you can often repay them over 60 months, possibly lower your interest rate and pay any arrears you owe on secured debt interest free. If you owe taxes, you can also derive a lot of benefits from Chapter 13 including eliminating penalties, stopping further interest from accruing, amongst other benefits.

Finally, one of the best parts of bankruptcy is the automatic stay. Many times, when you are negotiating settlements or working with a debt consolidator, you may end up getting sued by your creditors and have a judgment entered against you. While this is not fair and may have other legal implications, it does happen. In bankruptcy, all lawsuits and collections must stop and creditors cannot pursue you in multiple ways. They have to stop the harassment and your debts will be dealt with in the bankruptcy court.

So, if you are interested in saving money, avoiding possible tax problems and stopping creditor harassment, bankruptcy can be a very good way to accomplish all of these things.

Questions or interested in a free consultation about your case? Email Natasha Meruelo, Esq. at meruelolaw@gmail.com or call me at (914) 517-7565. The first consultation is always free.

Natasha Meruelo, Esq. is located at 445 Hamilton Avenue, Suite 1102, White Plains, NY 10601.

*Natasha Meruelo, Esq., designated as a Federal Debt Relief Agent by an Act of Congress and the President of the United States, proudly assists consumers seeking relief under the US Bankruptcy Code.   Prior results do not guarantee a similar outcome.

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