Is It Better to File for Bankruptcy or Pay Off Debt in Pennsylvania?

Bankruptcy is not a word many people in Pennsylvania like to think about. To most individuals, the idea of filing for bankruptcy is a nightmare and an embarrassment. There are other ways of dealing with debt, including negotiating with a creditor, hiring a debt settlement company, taking a consolidation loan, or continuing to pay minimum monthly interest payments on debt that never decreases. Bankruptcy is rarely the only option, but for people overwhelmed by debt, it is often the best one. Below, our experienced Philadelphia bankruptcy attorney from Young, Marr & Associates discusses the pros and cons of filing for bankruptcy versus paying off your debt.

Understanding Your Debt in Pennsylvania

For some people, filing for bankruptcy is taking a sledgehammer to a finishing nail. Bankruptcy was not designed for someone to avoid paying a $1,500 Visa bill. However, people who are considering or researching bankruptcy typically have significantly more debt. If you are struggling to make monthly credit card payments or are missing payments regularly, then filing for bankruptcy is probably a better idea than attempting to pay off your debt. In other cases, such as a foreclosure or repossession, filing for bankruptcy might be the only way to keep your house or property. Our affordable bankruptcy attorney in Pennsylvania is available to review your debt and options in a free consultation.

Alternatives to Bankruptcy in Pennsylvania

There are alternatives to filing for bankruptcy that many people consider first. In nearly every case, these other options are only viable if you have the funds to pay off all or most of your debt. Furthermore, while there are some legal safeguards in place to protect you, they do not provide the legal protections available when you file for bankruptcy.

Negotiating With Your Creditors

If you owe a credit card company or another creditor money that you cannot pay, you could negotiate directly with them. Creditors will rarely negotiate a settlement offer if you are paying the minimum monthly balance. Therefore, before you can engage in any meaningful discussions, you will have to miss several months of payments. This will not only lower your credit score, it could result in collection lawsuits. It is not uncommon for a creditor to sue you to obtain a judgment before negotiating a settlement. Pennsylvania creditors are granted a judgment lien on your home or other real property if they are successful in court. This judgment will be used as leverage against you until you satisfy a settlement agreement.

When someone negotiates with a creditor, they hope to pay less than they owe. For example, if you owe $20,000, a creditor might accept a lumpsum payment of $10,000. This amount will usually have to be paid within a short period and any amount that is forgiven will be considered taxable income. If you do not have the money to afford a large payment or have multiple creditors, negotiating is probably not advantageous.

Debt Settlement Companies

Some people turn to debt settlement companies to pay off their debt. Typically, these companies require an initial deposit of funds followed by monthly payments for at least 36 months. These funds will be placed into an escrow account and used to pay any fees the company charges. The rest will continue to build until the debt settlement company obtains an agreement with each of your creditors. This process is similar to negotiating alone, except a debt settlement company has the advantage of settling accounts in bulk.

There are several problems with this option. First, you will not be paying your creditors while you pay the debt settlement company, so you will be open to lawsuits and a diminishing credit score until the debts are satisfied. Secondly, there is usually no guarantee that your creditors will agree to a proposed offer. Additionally, while the fees are disclosed, they are often higher than what our affordable Philadelphia bankruptcy attorney would charge. If a creditor does agree to a lower settlement amount, you will have the accompanying tax consequences. Finally, if you are in foreclosure, working with a debt settlement company will not stop any legal proceedings against you.

Consolidation Loan

Another option people turn to is a consolidation loan. If you have multiple creditors, each charging a high-interest rate, combining all your debt into one low-interest loan is a viable option. However, there are some things to consider. In most cases, people take these loans to pay off unsecured debt, usually credit card debt. When you apply for a consolidation loan, the bank or financial institution will often require collateral, such as your house. Now, instead of a monthly payment for unsecured debt, you have a secured loan on your property. This means that if you default, the bank could foreclose on your home. If you were struggling or missing your payments previously, there is no guarantee that you will be able to afford your consolidation loan payments.

Benefits of Filing for Bankruptcy in Pennsylvania

Filing for bankruptcy offers many benefits that other options do not. It is a federal law that affords debtors legal protections that are not available otherwise. The most powerful one is commonly called the “automatic stay.” A stay is a legal injunction that prohibits creditors from taking action against a debtor, including phone calls, letters, and most importantly, other legal actions such as collection lawsuits, foreclosures, or sheriff sales. Basically, bankruptcy sets up a wall between you and your creditors.

Chapter 7 Bankruptcy

There are two types of bankruptcy filings available to most people in Pennsylvania. First is Chapter 7. If you qualify for Chapter 7, you will be able to eliminate most of your debt within five to six months. Chapter 7 debtors are typically not b required to pay their creditors anything. Additionally, any discharged debt will not incur any tax consequences.

There are income and asset requirements you must meet before filing. Unfortunately, there are also some debts, including certain taxes, student loans, alimony, and child support, that cannot be eliminated. In some rare cases, a trustee could take possession of some of your property and sell it. However, there are protections available to prevent this from happening. Our Philadelphia and Bucks County Chapter 7 bankruptcy attorney will review the eligibility requirements with you.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is designed for someone who has the means to pay a portion or all their debt. It is also commonly filed to stop a foreclosure and force a mortgage company to accept a payment plan. Depending on your income and assets, you will be required to pay a monthly payment that will be dispersed among creditors who filed timely and accurate proofs of claim. In some cases, a creditor will not file a claim. In others, our Philadelphia and Bucks County Chapter 13 bankruptcy attorney could have grounds to object to a claim –eliminating the need to pay the creditor. Filing for Chapter 13 removes the need to negotiate with each creditor individually. What each creditor is paid is determined by your income and non-exempt assets. This amount is usually less than working with each creditor, a debt settlement company, or taking out a consolidation loan. Furthermore, there are no tax consequences for debt that is ultimately discharged.

Contact Our Pennsylvania Bankruptcy Attorney to Review Your Debt

If the amount of your debt is causing you to miss some payments to pay others, you probably should consider filing for bankruptcy. People who have the ability to pay off their debt are rarely facing lawsuits, foreclosures, or repossessions. Fortunately, these are problems bankruptcy can help you solve. The Pennsylvania bankruptcy attorneys at Young, Marr & Associates want to dispel the misconceptions and myths regarding bankruptcy. Call (215) 701-6519 to set up a free and confidential appointment to discuss the benefits of filing for bankruptcy offers.