How Bankruptcy Compares to Debt Settlement

When a consumer’s choice is between debt settlement and bankruptcy, they are in serious financial trouble. They often need help determining which solution will protect their future. For some, bankruptcy is the only choice, by erasing some debt and protecting their property, or enabling them to pay off debt at a slower rate.

On the other hand, debt settlement may be the answer for others, allowing them to pay only a percentage of much of their consumer debt. However, be careful when talking to debt settlement companies, because some debt settlement companies are downright scams, preying upon unwary debtors. A good move may be to consult a bankruptcy attorney to guide them to the appropriate option. Many bankruptcy attorneys can effectively handle both types of cases.

Pros and Cons of Each

There are advantages and disadvantages to both bankruptcy and debt settlement, and the consumer’s particular situation may dictate the appropriate solution. Both require that consumers be significantly behind in their payments to creditors, otherwise there is no reason to file bankruptcy and creditors will be unwilling to settle for a small percentage (between 35 and 50%) of what is owed. These options include:

Bankruptcy

• Chapter 7 may require some non-exempt property to be liquidated to pay down consumer debt
• Chapter 13 requires debtors to reorganize and continue to pay off debts, however, at a much lower rate
• Damages a consumer’s credit record for up to 10 years
• Erases most consumer debt, while most secured debt remains to be paid off, repossessed, or foreclosed upon
• Generally requires the services of a bankruptcy attorney
• Still may not resolve all financial problems

Debt Settlement

• May require a debt settlement company or attorney to negotiate with creditors for a good settlement
• May seriously damage a debtors credit
• Creditors that accept debt settlement plans often want lump-sum settlements creditors go unpaid while the consumer saves that lump sum
• Debtors can still be sued
• Requires income to exceed necessary expenses so debtor can eventually pay off settlement amounts
• Requires careful selection of a reputable company
• Debtor must qualify, with debt generally over $7,500
• May result in additional income taxes on the forgiven debt amounts unless the debtor is insolvent

Which Is Better

This may depend on the debtor’s situation:

For those whose income exceeds their necessary expenses, handling debt settlement themselves or through an attorney may help them avoid scams and control their own monies

For some consumers, the protection of bankruptcy may be the wise choice is generally a necessity

Avoiding Debt Settlement Scams

One of the easiest ways to determine whether a debt settlement company is attempting to take advantage of a consumer is to learn if they charge their fees up-front, or if they bill the consumer when services are provided. In addition, if they are unwilling to put an agreement with a consumer in writing, they are not a wise choice.

How an Attorney Can Help

In determining the best debt solution for their family, consumers would be wise to consult an attorney. These are life-changing choices, and in many cases, the wrong choice can haunt them for the rest of their lives. Many bankruptcy attorneys also provide debt settlement service as well. This may provide the guidance a consumer needs to find the best choice for them.