Debt settlement allows a borrower to pay part of what is owed on a debt. The rest of the debt is then forgiven. A borrower can try to settle alone or ask a company to represent them. When settling is not an option, they can file for bankruptcy or create a Consumer Proposal Toronto.
There are serious consequences to settling. The action stays on a credit report for seven to ten years. The collector may choose to sue borrowers rather than work with them. The entire procedure usually takes about two years. Most significantly, difference between what the borrower owed and what the borrower pays is considered income. This income is taxed by the government at the borrower’s marginal tax rate. For example, if a consumer had a $10,000 debt and settled for $2500, then $7500 dollars would count as taxable income.
Working with a settlement company has advantages and disadvantages. The industry is largely unregulated, so fraud is a very real danger. It costs around fifteen to twenty percent of the amount that you owe. Good companies meet several criteria. They never promise results. They display written policies and procedures. Many good companies are members of the Better Business Bureau or TASC, The Association of Settlement Companies. Without exception, they fully disclose all fees.
A good company also never keeps directly handles money. They do not take money from the borrower to keep in escrow. Instead, they require the borrower to save and pay the settlement directly. In addition, good companies charge fees based on results. Their counselors do not collect commissions. Many also offer a thirty-day window during which borrowers can recover at least part of the fee if they change their mind.
Sometimes, bankruptcy is a better option than settling. This is particularly true if the borrower has no resources with which to settle the debts. A Chapter 7 bankruptcy usually takes four months to complete. To qualify, the borrower’s income must be less than the state median. They cannot have filed for bankruptcy in the last seven years. The disadvantages are that a borrower’s home, car, and assets are placed in jeopardy. However, what can’t be paid off is discharged.
A Chapter 13 bankruptcy sets up a three to five-year repayment period. The borrower keeps home and vehicles as long as he or she makes the payments. Both types of bankruptcy stay on the credit report for seven to ten years. However, creditors generally look more favorably upon a Chapter 13 bankruptcy.
A bankruptcy trustee can also set up a consumer proposal. Before filing for bankruptcy, borrowers can ask a trustee to put together a proposed repayment plan. This proposal is sent to all involved creditors. The creditors then have forty-five days to accept or decline the proposal. The majority of creditors favor the proposal over bankruptcy. Once collectors accept a proposal, they can no longer garnish wages. Interest rates are frozen, and lawsuits against the borrower are prohibited.
People who have run into serious money problems have several options. A debt settlement, a bankruptcy, and a consumer proposal all come with advantages and disadvantages. Always consult a professional before making a final decision.
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