Troubled by mounting debts? Thinking of filing for bankruptcy as your absolute last resort? At the same time considering debt settlement options? But unable to decide on which one will be better for you? Here is how you should go about it:
Determine your debt
This is the first thing that you need to do in order to start your analysis on which option would be better of the two – Debt Settlement and Bankruptcy.
First you need to know the amount of money you owe to the creditors i.e. how deep in debt you are. The best way to go about it is to get your credit report from one of the three credit bureaus (Experian, Equifax Credit Information services and TransUnion) in US. This will solve two purposes for you:
- You can get a consolidated report of all the various debts against your name and the details on each (i.e. the outstanding amount, the creditor etc). You can use this to calculate your total debt.
- You can check the credit report to see if there are any discrepancies (e.g. you might have already cleared a debt, or an account listed there might not belong to you). If there are any discrepancies then you will first need to get these corrected. Besides giving you (and your creditors) a clear and accurate picture about your financial situation, a credit report also determines your credit score and your eligibility to get loans in future. In fact, some employers use the credit report to check the credibility of the job applicants.
Once you have the data, you can sum up the debts and classify them under secured and unsecured debts; and get a clear picture of your debt situation.
Determine your current financial situation
This is where you calculate your monthly expenditures and incomes. So, just get all your data together and create two spread sheets. List your monthly necessary expenses in one sheet and the monthly income from all sources in another sheet.
Here it is important to note that you should include only the necessary items in the expenses sheet. All the luxuries, eating out, getting the new gadgets, vacation etc should not be included as necessary expenses. Also, you should keep the debt payments out of this list.
Similarly, while listing your monthly income, you should include pay from part time work, over time pay (if it is regular) and every cent that you get from any source.
Once you have these two lists ready, you can sum up the values in order to determine your total monthly expenses and total monthly income. You can subtract total monthly expenses from total monthly income in order to calculate the disposable income that you have. You could even take off 10% for contingency, to get the final disposable income.
Decide between debt settlement vs. bankruptcy
Once you have the disposable income calculation done, you know what amount you can spend towards settling debts. So, it’s time to decide between debt settlement vs. bankruptcy. Here is how you go about deciding debt settlement vs. bankruptcy:
If the disposable income is good enough to meet the minimum payment requirement on each of your debt and also pay back enough so as to avoid the debt from increasing any more, then you might as well continue without the need for debt settlement or bankruptcy. Or you might even try other options like debt consolidation or home equity line of credit etc.
If the disposable income is okay but not enough to meet your minimum payment requirement on all the debts, then debt settlement is the way to go in most likelihood; and you can start exploring your options.
If your disposable income is a negative value then it means that with your current income you don’t even meet your basic expenses. So, debt settlement, obviously, is not a viable option for you. Bankruptcy might be the way to go and you should consult a professional to get you sorted and help you further evaluate the viability of filing for bankruptcy.