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Collections in Debt Relief vs Bankruptcy

Collections in Debt Relief 

Most debt relief programs work by taking all of your bills and then charging you one monthly amount. The debt relief company keeps some of the money as their fee and saves the rest to offer to your creditors. They will typically offer to pay a percentage of what you actually owe. This continues until you have wiped out your debt.This approach still leaves you vulnerable to collection agencies because the bills continue to add up as you make payments to the debt relief program. Accounts that were not in collections already can still be put there, and collectors can continue to call and ask for payment. Any fees or penalties will continue to accrue as long as the debt doesn't get paid.

Collections in Bankruptcy

When you file for bankruptcy, collectors are legally barred from calling you. If collection agency representatives continue to bother you, they can face legal consequences.

Time Differences

Debt Relief Programs

A debt relief program can take a long time depending on how much money you owe to different creditors. Many debt relief programs are designed to take 5 years before all of your debts are paid and you are no longer using the program. During that time, your accounts can still collect fees and penalties as well as accrue interest.


Bankruptcy proceedings don't take as long as debt relief programs. Once you have filed for bankruptcy, the process moves quickly. Creditors are stopped from harassing you, and a plan is made by representatives of the bankruptcy court to either discharge or make a payment plan for the money you owe.If you have a bankruptcy payment plan, the details will vary based on how much you owe and the type of debt being paid. However, penalities will not continue to be added to the debt that is part of your bankruptcy plan. 

Damage to Credit

Debt Relief Programs and Your Credit Score

Enrolling in a debt relief program will not build your credit score. in fact, because most debt relief programs tell you to stop paying your bills, your credit will probably take some negative hits at first. It will not get better until the debt relief company successfully negotiates a decrease in your debt and uses your payments to pay the debt off in full.Your creditors are not required to accept negotiations from the debt relief company and will continue to add penalties and fees to your debt as long as it is not being paid. This can continue for as long as it takes to pay the debt back, which could be several years. Credit score hits from collections do not generally come off your credit report until 7 years after the collection action was taken. So if it takes 5 years to pay the debt, it could negatively impact your credit score for 12 years. 

Bankruptcy and Your Credit Score

When you file for bankruptcy, your credit score will take an immediate hit. A chapter 7 bankruptcy stays on your credit report for up to 10 years, and a chapter 13 bankruptcy stays on your credit report for up to 7 years. However, accounts with debt that has been discharged will also show up right away.You can start rebuilding your credit immediately after filing for bankruptcy by taking actions like opening secured credit card accounts and paying these bills regularly. Over time, the bankruptcy will matter less and you will be able to get traditional credit again.

Taxes in Debt Relief vs Bankruptcy

Taxes Owed in Debt Relief

You will need to pay close attention to the way your debt relief program pays your creditors because in some circumstances you will owe taxes on the money you save. If your debt relief program negotiates payment for less than you owe, the remaining amount is reported as taxable income. You will be required to include this income when you file your yearly taxes.

Taxes in Bankruptcy

If part of your debt is money you owe to the IRS, it is possible to discharge some of that debt as part of your bankruptcy case. There are specific conditions that must be met for this to be possible, and you should discuss this with your attorney.When you file for bankruptcy you will still be responsible for paying current income taxes and for filing each year. However, you will not be charged extra tax on debts that were discharged or reduced as part of a bankruptcy.


Debt Relief Scams

You must be very careful when you choose a company for any kind of debt relief program or service. There are debt relief companies that have scammed innocent people out of a lot of money. They may keep the bulk of your payments as their fees and apply very little, if any, to your debt. You could end up paying the debt relief company and still have the same amount of debt as when you started the process.Be sure to read reviews and check the legitimacy of any debt relief program before you sign up or send them any money. Check the company with organizations that assess businesses, and find out what they have done for other people in your situation. Know how they distribute the money to your debtors and how much you can expect them to pay on your behalf each month. Find out how quickly they negotiate and if they attempt to reduce every debt.

Bankruptcy Scams

Hiring an experienced bankruptcy lawyer will ensure that you are not a victim of any type of scam. Bankruptcy is a program that is completed through the courts, not private companies, so it is a safe alternative to private debt relief programs.While your specific situation is evaluated as part of your bankruptcy claim, the same laws apply to everyone in bankruptcy court. You will not have to worry about your money being stolen or mismanaged, and you will know exactly what you are agreeing to from the beginning.Sometimes debt relief agencies make it seem like they can easily solve your financial problems, but you must be careful in evaluating these programs to understand exactly what you will be getting and giving up. If you have debt that is out of control, contact us at Stockton and Stern LLC for a free consultation. We will explain the bankruptcy process and talk to you about the right choices for your situation. We want to be there for you when you need a second chance.