Debt Settlement vs. Chapter 13 Bankruptcy

If you have a very serious debt problem, you may have reached a crossroads at which you need to decide between two debt solutions: debt settlement and Chapter 13 bankruptcy. If you’ve narrowed down your debt solution choices properly to these two options, then you have already ruled out credit counseling services with a debt management plan (DMP) and Chapter 7 bankruptcy as possibilities. In doing so, you must have determined (with the assistance of a debt professional) that your current debt load was simply too large for you to deal with, even with the assistance of reduced interest rates, consolidation, financial counseling and other benefits provided by credit counseling and a DMP. You also must have determined that you don’t qualify for a Chapter 7 bankruptcy based upon your inability to pass the 2-part “means test” instituted in the 2005 bankruptcy reforms.

If the aforementioned statements are a reasonably accurate description of your own analysis, then you’ve properly assessed what your best debt relief options are likely to be. Your debt crisis is severe enough that the benefits of these debt relief solutions outweigh the credit damage (albeit shorter-term with debt settlement) that will ensue. So now let’s take a little closer look at each of these two remaining options and get a better understanding of why someone might make an informed choice in favor of either debt settlement or Chapter 13 bankruptcy.

Debt Settlement vs. Chapter 13 Bankruptcy

Photo by Mike_tn.

In a debt settlement program, your balances will typically be reduced by 40% to 60% and you can completely pay off your unsecured debts in just a few years or even less, depending on if you are able to allocate more than the required minimum payments of the program. You will stop paying any interest at all on your debt, so the entire monthly payment you send to the debt settlement company will go toward paying off your principal balances, less any fees the company charges for the debt settlement program itself. Consider the possibility that if you are currently making just the minimum payments on your credit cards (and continue to do so) and your interest rates are high, it may take you 25 to 30 years or even longer (depending on just how high your rates are) to eliminate your debt. Clearly there are substantial benefits possible from a debt settlement program.

When even these benefits are not sufficient to realistically get you free from your debts, then you may have to opt for a Chapter 13 bankruptcy. By going this route you must pay the heavy price of severely damaged credit lasting as long as 10 years or more, plus pay attorney fees and commit to a repayment program lasting a maximum of five years.

If the penalties of Chapter 13 bankruptcy are just too severe for you to tolerate, you may be better off choosing debt settlement. On the other hand, if the financial assistance you need is even beyond what debt settlement can provide, your best decision may be to bite the bullet and find a good bankruptcy attorney. But before you opt for either of these solutions and damage your credit, make absolutely certain that the benefits of a DMP are inadequate to resolve your debt problem.