Should I file for bankruptcy or try to settle my debts?

Most of us have debts.  The average American household today owes $6,662 in credit card debt, according to the Federal Reserve Report on the Economic Well-Being of U.S., and $106,132 in mortgage debt.  On top of these debts, many of us owe money on our cars and may have unpaid medical expenses.  While some debt is surmountable with financial planning, when you find yourself falling further and further behind on payments it may be time to consider taking a more drastic step towards debt elimination.  Two of the most common debt relief options include Chapter 7 bankruptcy and debt settlement.  

Filing for Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy, you can entirely wipe out your unsecured debts, including medical bills, unsecured loans, and credit card bills.  In order to be eligible to file for Chapter 7, you must meet income guidelines set out in the means test.  Guidelines will compare what you make for a family of your size to that of the average family in Ohio.  You must be at or below the income limit for a family of your size to file, unless you can show that you do not have sufficient disposable income to repay your debts each month.  

Chapter 7 has many advantages.  With a Chapter 7 bankruptcy, you can emerge from bankruptcy completely debt free, allowing you a fresh start.  There are also some down sides.  Those with assets may be forced to give them up and your credit will take a hit initially.  An experienced bankruptcy attorney will review your income, debts, and assets to determine whether bankruptcy is the best option for you.  

Debt Settlement Explained

Debt settlement involves asking your creditor to accept an amount that is less than what you owe in order to resolve the debt.  Most creditors will only consider debt settlement if the debt is significantly past due.  The amount you ultimately settle on will depend on the creditor and your negotiation skills, but you can expect to settle for somewhere between 35 and 75 percent of the total balance.

There are numerous companies that offer debt settlement services.  Be careful as these companies generally charge a fee and some have been reported as scams.  Debt settlement can provide the answer for some individuals with one or two big debts that they have the ability to partially repay.  For those with significant debts and limited assets, however, debt settlement may not be sufficient.