(Note: The author is not an attorney and this article should not be construed as legal advice.)
As you can see by my little disclaimer above, I'm not an attorney. That said, potential clients often ask me whether they should file for bankruptcy or try to settle their debt. In every case, I give them the same piece of advice: look at all available options, and then make an education decision. I also stress that when asking for advice, remember who is giving you the advice and what they potentially have to gain from it.
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When I say that you should make an educated decision, I'm talking about weighing factors like:
- What will it cost you in real dollars to file and get discharged from bankruptcy vs. what will it cost you in real dollars to settle?
- Are you comfortable having a bankruptcy on your credit report?
- Are you confident that you'd qualify for bankruptcy discharge?
- Do you have the resources to settle your debt (also accounting for tax consequences)?
- Do you have so much debt with so many lenders that settling would be almost impossible?
- Will a bankruptcy wipe out the liens that your lender has on your home? (Note: in my experience, liens survive bankruptcy, meaning that a release of the lien would still need to be negotiated with the bank. If your home has sufficient equity to repay the loan in full, there is a chance that the bank could still foreclose despite the bankruptcy).
Most of my clients make the decision to try to settle first, rationalizing that if it doesn't work out, they can always file for bankruptcy after. That strategy makes sense to me, especially in cases where the SBA debt is the only debt that needs to be addressed. Banks and the SBA understand that personal bankruptcy is a real possibility in many cases, which is why they are often willing to entertain settlement, especially in cases when the collateral has minimal value, and a discharge from personal bankruptcy would essentially wipe out any chance at a recovery.
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