Are you struggling to keep up with your debt payments? Do you feel like you have no way out of your financial situation? If so, you might be wondering whether debt settlement or bankruptcy is a better option for you. In this article, we will compare these two debt relief methods and explain the pros and cons of each one. We will also provide some options that you have in both scenarios, and why you should consider debt settlement rather than bankruptcy.
What is debt settlement?
Debt settlement is a process where you negotiate with your creditors to reduce the amount of debt that you owe them. You can do this yourself or hire a debt settlement company to do it for you. The goal is to reach an agreement where you pay a lump sum or a monthly payment that is lower than your original balance. In exchange, your creditors will write off the remaining debt and stop charging you interest and fees.
Unless consumers reach out on their own, a settlement could come as part of the debt collection process—under legal mandate.
Proactive debt settlement can help you save money and get out of debt faster than paying the minimum payments. However, it also has some drawbacks, such as:
- It can negatively affect your credit score, as your creditors will report your accounts as settled for less than the full amount.
- It can trigger tax liabilities, as the forgiven debt may be considered as income by the South African Revenue Service (SARS).
- It can expose you to legal action, as your creditors may sue you for the unpaid debt before or during the negotiation process.
- It can be costly, as you may have to pay fees to the debt settlement company or set aside money in a separate account for the settlement offer.
What is bankruptcy?
Bankruptcy is a legal process where you surrender your estate (your assets and liabilities) to the court for the benefit of your creditors. This process is also known as voluntary sequestration. The court will appoint trustees who will sell your assets and distribute the proceeds among your creditors according to their ranking. The court will also discharge you from most of your debts, except for those that are excluded by law, such as taxes, fines, maintenance, and student loans.
Bankruptcy can help you get rid of most of your debts and start afresh financially. However, it also has some serious consequences, such as:
- It can severely damage your credit record, as it will remain on your credit report for 10 years or until you are rehabilitated by the court.
- It can limit your future borrowing options, as you will not be able to apply for credit or enter into contracts without the consent of your trustee or the court.
- It can affect your employment prospects, as some employers may not hire you if you have a history of bankruptcy.
- It can impact your lifestyle, as you will lose control over your assets and income and have to follow certain rules and restrictions imposed by the court.
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What are your options in both situations?
If you are considering debt settlement or bankruptcy, you should first explore all other possible alternatives, such as:
- Debt counselling: This is a process where a registered debt counsellor assesses your financial situation and helps you restructure your debt payments under a court-approved plan. You will pay a reduced monthly instalment to a payment distribution agency, which will distribute it among your creditors. You will also be protected from legal action and blacklisting by your creditors while under debt review.
- Debt consolidation: This is a process where you take out a new loan to pay off all your existing debts. You will then have only one monthly payment to make at a lower interest rate and a longer repayment term. This can help you reduce your monthly expenses and simplify your debt management. However, you will need to have a good credit score and enough income to qualify for a consolidation loan.
- Debt restructuring: This is a process where you contact your creditors directly and ask them to lower your interest rates, extend your repayment terms, or waive some fees. You may also ask them to accept a payment holiday or a reduced settlement offer. This can help you reduce your debt burden and avoid defaulting on your payments. However, not all creditors may agree to this option or offer favourable terms.
Why should you consider debt settlement rather than bankruptcy?
Debt settlement and bankruptcy are both extreme measures that should only be used as a last resort when all other options have failed. However, if you have to choose between them, debt settlement may be preferable for several reasons:
- It can preserve some of your assets, as you will not have to surrender them to the court or sell them to pay off your debts.
- It can shorten the recovery period, as it will take less time to rebuild your credit score and regain access to credit after settling your debts than after filing for bankruptcy.
- It can give you more control over the process, as you will be able to negotiate with your creditors directly or through a reputable debt settlement company rather than relying on the court’s decision.
- It can reduce the stigma and stress associated with bankruptcy, as you will not have to face the legal and social implications of being declared insolvent.
Debt settlement and bankruptcy are two ways of dealing with unmanageable debt, but they are not without risks and costs. Before you decide on either option, you should consult a professional financial adviser or a legal expert who can help you understand the implications and consequences of each method. You should also weigh the pros and cons carefully and consider all other possible solutions that can help you get out of debt without jeopardising your future financial well-being.
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