Should I file bankruptcy or try debt settlement?

Dear Liz: My question is whether I should file for bankruptcy or try to settle my debts.

I owe about $50,000 on credit cards, $120,000 in student loans and $701,000 on my home. I have stopped paying on my credit card debt because my issuers increased their rates and were unwilling to work with me, so I am unable to pay even the minimums they now require. My mortgage is being modified, although it has been four months since the process started and I have received a notice of default, which is the first step in the foreclosure process.

I am unsure what to do, but I do know I don’t have anywhere else to go. I have to provide a safe haven for my children and disabled parents. What’s your advice?

Answer: You need to talk to a bankruptcy attorney, pronto.

That doesn’t mean filing for bankruptcy will necessarily be the right choice. You won’t be able to eliminate your student loan debt. If your income is too high, you’ll be put on a payment plan instead of being able to erase the credit card debt.

But it may well be the best of bad options. Debt settlement is typically available only for credit card debt, and you would need a sizable lump sum of cash to persuade your issuers to negotiate.

And even if you get a mortgage modification, your housing problems may not be solved. Borrowers too often agree to a modification of a debt that never has been, and never will be, affordable. That’s why so many mortgage modifications have resulted in default and foreclosure.

What you need is an educated third party to look at your finances and explain your options to you.

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