Myth: Bankruptcy is Always a Better Option Than Debt Settlement

Key Takeaways
  • The best debt relief option depends on the severity of your financial hardship.
  • Bankruptcy should always be the last resort because of the long-term effects on your finances.
  • Debt settlement provides similar benefits to Chapter 13 bankruptcy, without the bankruptcy and court oversight.

Reality: Bankruptcy should always be used as the last resort because it does the most damage to your financial well being.

There are multiple solutions available to consumers who are unable to maintain payments on outstanding debts. The optimal choice for you will depend on the severity and length of your financial crisis.

A hardship that affects your long-term income could require the drastic step of filing bankruptcy. However, if you earn enough to pay your monthly living expenses, plus a little extra, debt settlement could be more beneficial.

How Does Bankruptcy and Debt Settlement Work

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Individuals have two bankruptcy options, Chapter 7 or Chapter 13. If you qualify for Chapter 7 bankruptcy,the trustee will sell all non-exempt assets. The process will discharge debts quickly without requiring repayment to qualified creditors.

Chapter 13 requires you to repay creditors for up to five years and protects assets like your home because filing bankruptcy temporarily stopswage garnishments, a foreclosure,or other legal proceedings. A judge discharges qualified debt at the end of the program.

To qualify for debt settlement, you must have a financial hardship. The loss of a job, a family crisis, or divorce are common reasons that might qualify you for debt settlement. You retain control over which creditors you enroll in the program and how much you can afford to pay toward debt elimination. Before creditors negotiate your balance, you must have a delinquent account and enough money saved to pay the negotiated balance.

What Debts Can You Include in Bankruptcy and Debt Settlement?

Both debt-relief options offer assistance with unsecured debts. Credit card balances, personal loans, medical debts, or delinquent utilities are examples of qualified accounts.

Chapter 13 bankruptcy is the only debt relief option that can protect secured assets such as your home or vehicle. Once you file, a judge will temporarily stop all court proceedings, and you are given time to catch up on payments if you want to keep the asset.

How Will Bankruptcy and Debt Settlement Impact Your Credit?

Bankruptcy will harm your credit more than any other debt relief option and will remain on your credit report for up to ten years. You must also attest to filing bankruptcy anytime an application asks the bankruptcy question.

Successful debt settlement requires delinquent accounts. Your credit file tracks your payment history for seven years, starting from your first missed payment, provided you never catch the account up.

How Long Does It Take to Pay Off Your Debts?

Chapter 7 bankruptcy could discharge debts in as little as six months.

Chapter 13 bankruptcy will discharge debts after making payments for five years.

Debt settlement will take between 24 and 48 months, depending on your monthly contributions to your program savings account. After a creditor agrees to a settlement, you have no further legal obligation to repay any remaining balance.

How Much Will You Pay Out of Pocket to Eliminate your Debt?

Chapter 7 does not require any repayment of qualified debts.

Chapter 13 requires you to contribute 100% of disposable income toward debt repayment for five years. The discharge of any remaining balances on qualified debts occurs after you complete the program.

Debt settlement gives you more control over the monthly contributions used to repay creditors. You can expect to save between 20 and 80% of enrolled balances.

What Happens if You Can’t Complete the Program?

If you qualify for Chapter 7, you could eliminate your legal obligation to repay creditors within six months.

Once enrolled in Chapter 13, the court will supervise creditors’ repayment based on a court-approved plan. If your financial situation deteriorates further, you could qualify for Chapter 7.

Failing to complete a debt settlement program could leave you paying the full balance plus late fees for enrolled accounts not settled. However, enrolling in debt settlement will not disqualify you for bankruptcy if it becomes necessary.

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Final Thoughts

When your circumstances prevent you from making any payments toward unsecured debt, or you need court protections, bankruptcy may be the best solution.

Suppose your financial hardship leaves you with enough income to cover essential expenses. In that case, debt settlement could cost the least amount of money with the least number of restrictions while still providing the debt relief you seek.

  • What is the distinction between debt relief and debt settlement?

    Debt settlement is a form of debt relief. Other debt relief options include debt consolidation loans, credit counseling, and bankruptcy.

  • Is bankruptcy better than debt settlement?

    Bankruptcy and debt settlement serve two different types of clients. Chapter 7 bankruptcy helps consumers who cannot make any payment toward outstanding debt and do not have any assets to sell for debt repayment. Debt settlement serves consumers who earn enough to put something toward eliminating their debt, but not enough to pay the accounts in full.