Are you overburdened with debt and can’t figure out how to get out of it? Well, debt settlement and Chapter 13 bankruptcy are two suitable options to get rid of your dues when you are neck-deep in debt.
However, debtors often become confused about which is the right option. To decide, you first need to clearly understand both debt relief options. You need to understand how they work, their similarities and differences, and know which is the more suitable option based on your financial situation.
Debt settlement – What is it all about?
Many people opt for debt settlement when their debts are enormous and they can’t repay the entire amount.
Debt settlement is a debt relief option through which you get rid of your dues by paying less than what your outstanding balances are. To do so, you need to convince your creditors to accept a reduced payoff amount and settle the account.
You can negotiate with your creditors on your own or seek help from a debt settlement company or a law firm to settle your debts. The primary idea is to convince your creditors to agree to a reduced amount since you can’t repay the dues in full.
You may ask, why would a creditor agree to debt settlement?
Well, the reason is that if you, the debtor, file bankruptcy, then the creditor might not get anything. So, it is profitable for the debtor to get a reduced amount instead of nothing. It is a hassle for a creditor to file a lawsuit and get a judgment from the court to garnish your wages and recover the unpaid amount.
As I said, you can take professional help if you can’t convince your creditors on your own. When you approach a settlement company or a law firm, they analyze your financial situation and decide upon a monthly amount you need to pay to the company every month. In the meantime, the organization will negotiate with your creditors to reduce the debt payoff amounts. Once you accumulate a significant amount in the law firm’s escrow account, it will make a lump sum payment to a creditor, and your debt will be settled. Thus, your debts are settled, one by one.
Chapter 13 bankruptcy – How does it work?
Though bankruptcy is considered the last resort for a debtor to become debt-free, it helps you get a fresh start after you’re discharged of all your debts.
Chapter 7 bankruptcy helps you to wipe debts quickly. However, you need to qualify through a means test based on your income to file Chapter 7. If you’re not eligible for it, your only resort is to file Chapter 13 bankruptcy. However, you still need to meet the eligibility criteria to file Chapter 13.
In this bankruptcy option, you can keep all your property. Through a court-approved plan, you can get discharged from debts within a span of three to five years.
Debt settlement and Chapter 13 bankruptcy – Similarities and differences
The similarities:
- Both help you become debt-free relatively quickly.
- You have to pay less than what you owe to your creditors.
- Both the options can drop your credit score to some extent.
- The negative items will stay on your credit reports for seven years.
The differences:
| Debt settlement | Chapter 13 bankruptcy | |
| Time taken to become debt-free | 1-4 years depending on your debt amount | 3-5 years |
| Possibility to do it on your own | Yes | No |
| Intervention of court | No | Yes |
| Effect on credit score | Relatively less | Relatively more |
How to decide which one is right for you
Now comes the most challenging part: how do you choose the right option for you?
As a thumb rule, you can choose bankruptcy when you have massive debt and nearly no savings to repay your dues. However, you will have to pay lawyer’s fees to opt for bankruptcy.
Even if you opt for debt settlement, you will have to pay the fee for the services offered. In both cases, a portion of your debt is forgiven. However, in bankruptcy, you don’t have to pay tax on the forgiven debt amount. But, most likely, with settlement, you will have to pay taxes on the forgiven debt amount.
Even if you opt for bankruptcy protection, you can start recovering your finances once you get discharged from your debts through the repayment plan.
Do you have some funds to repay your debts? If so, you can consider settling your debts. You can try negotiating with your creditors independently, but there’s no guarantee that they’ll agree to reduce the debt amount. Here, opting for professional help is a better option.
However, while opting for professional debt settlement, make sure you choose a reputable law firm to handle every aspect of settlement in a hassle-free way. Look for an organization that has been in business for at least five years, has a satisfied clientele, and doesn’t ask for any upfront fees. When choosing a company, ask whatever questions come to your mind and make sure you get satisfactory answers. Possible questions should be: how long will it take to become debt-free, how they will charge for professional services provided, and how much you can save during the settlement. Make your choice based on the answers you are getting from the law firms.
If you are still unsure about which option to choose, you can speak to a credit counselor. A certified counselor can analyze your financial situation and help you choose the right debt relief option for you.
At last, I would like to encourage you not to view settlement or bankruptcy as a stigma. Instead, a debt relief option can help you recover your debt problems and give a fresh start to your finances. Once you shred off your debts, you can start managing your finances so you can add positive items to your credit report and gradually improve your score. So, never fear the stigma; choose a suitable debt relief option, budget well to save as much as you can to repay your debts, and manage your financial life in the best possible way.
Author Bio & Headshot – Lyle Solomon Esq.
Website : https://www.ovlg.com/attorneys/lyle-david-solomon
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I have significant hands-on skill and expertise in legal research, writing and extensive litigation experience. I provide non-commercial legal assistance and create non-commercial educational articles to assist people in resolving financial issues such as bankruptcy, debt settlements, and loans.
I have been licensed with the state bar of California since 2003, and graduated from University of the Pacific, McGeorge School of Law, Sacramento, California in 1998.