Debt settlement or bankruptcy: Which option is better for consumers?

Both chapter 13 bankruptcy and debt settlement are good options to help you tackle debts.

But there are situations when even the most intelligent mind fails to understand which option is the most suitable one, Chapter 13 or debt settlement?

But before I begin, I want to clear one thing:

Why do people avoid bankruptcy?

The answer is highly obvious and true.

Because people don’t want to ruin reputation and get a social stigma attached to their name!

In this post, I will be having a neutral opinion towards Bankruptcy Chapter 13 and debt settlement.

What option is better for you is completely dependent on your debt situation, which is unique from people to people and state to state.

Read on to understand the basic differences and characteristics of settlement and chapter 13 bankruptcy.

Why Chapter 13 bankruptcy and debt settlement might sound similar at times?

People confuse them because there’s one thing that both of them does at the end of the day, that is to settle debts.

But the methods are different and so are the results!

With chapter 13 bankruptcy, you will be provided with a repayment plan, with the help of which you will be able to come out clean from your debts.

In chapter 13, many of your unsecured debts will get discharged, and the amount of non-dischargeable debts will be negotiated!

The same thing happens with a settlement, but here there won’t be any discrimination between dischargeable and non-dischargeable debts.

As per the negotiation with your creditors, your debt amount will be reduced and you will pay a lump sum to clear your debts.

What are the salient features of Chapter 13 bankruptcy?

1. The repayment plan:

This is the most important part of chapter 13.

This repayment plan will help you to deal with your debts in an organized manner.

This is a court-approved plan, and will usually provide you with 60 months time to clear your debts.

2. Automatic stay:

Once you file bankruptcy, this automatic stay will be activated on you, which will prevent you from getting sued by any creditor and court agreements.

The automatic stay will halt any foreclosure proceedings on your mortgage.

It will also stop your utilities being cut and won’t allow evictions from the landlord’s side!

It will stop wage garnishments and your over-payments of Public Benefits being taken back from you!

3. Chapter 13 Bankruptcy requires you to pay some fees:

Chapter 13 has a liability that you will have to pay administrative claims in full.

These will be your filing fees, the trustees commission (Usually 3%-10% of your monthly income), and the fees of attorney!

4. Secured debts are given good priority:

Secured debts have a collateral attached to it, and the creditor is secured in the sense that if you default on the payments, then they might take away the property.

These debts or loans will have to be paid off in full, only that the proposed repayment plan will help you to organize your payments.

There’s another thing you must know and that’s about your mortgage. As per the court proceedings and the judgements made by the attorneys and the trustee, your secondary mortgages can be stripped down if the current value of your home is less than the loan amount.

Again, your overall mortgage amount can be cramped down if the loan amount exceeds your property’s current value!

The same thing can also be applied to other secured debts, like car loans,...etc.

5. Unsecured debts might get discharged:

When you file for bankruptcy, you might be able to evade maximum of your unsecured debts and even if you have some of them hanging around, their amounts could be reduced quite a bit.

Usually, most of your credit card debts, utility bills, and other consumer debts have a huge chance of getting discharged. That means you practically have to pay nothing for them.

6. You get to keep your assets:

The good news is, Chapter 13 doesn’t require liquidating your assets.

This means you get to keep all your property with you, and still be able to repay your debts with the help of the repayment plan as given to you!

7. You can’t erase taxes and other priority claims:

You will have to pay back taxes and other claims in full. Like money, you owe to your employees, alimony, child support, and other debts, say an employee benefit fund!

What are the salient features of debt settlement?

1. Secured debts cannot be settled:

Debt settlement can only help you with unsecured debts.

It can never help you with secured debts and chances of getting your debts discharged are practically next to none.

People usually go for debt settlement when they have too much of consumer debts that are hurting their credit profile and are turning out to be a menace!

These debts include credit card debts, utility bills, payday loans, and personal loans.

2. The negotiation:

The is the most important part of debt settlement that determines how much your debts will be reduced.

This is a bit difficult and hence it is always advised to seek the help of attorneys or a legal debt settlement company to help with the negotiation.

It’s hard to make the creditors agree on a lowered debt amount, and usually the negotiation might become more of an argument!

3. Debt settlement may or may not require you to pay fees:

There’s nothing such as the cost of settlement if you do the settlement yourself.

But if you are taking help from a settlement company, then they will charge you a fee after they have settled at least one account.

How to look out for the best debt settlement company:

Debt settlement has a bit of bad reputation due to the increasing number of fraud companies in the market.

Still, it’s not that hard to find the authentic one!

Here are a few tips to choose the right debt settlement company.

Is chapter 13 and settlement similar? Which one should be your move?

No, chapter 13 and debt settlement are not similar, as with settlement you have no option to get your debts discharged!

If you have read this post clearly, then I guess you have figured out that your debts will determine which option is better for you!

With either of the methods to be debt free, you are always advised to go for credit counseling and have a talk with attorneys to see how to tackle your debts.

Before I end, there’s another thing I want to say.

Chapter 13 bankruptcy is a legal procedure that involves court laws and regulation, hence there ain’t no chance of falling into fraudulence.

Whereas with a settlement, you gotta keep your eyes open and avoid fraud settlement companies who only drains money out of their clients!