Debt Settlement vs
Bankruptcy
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is typically filed by those with a lower
income and few assets. If your income
qualifies for Chapter 7 bankruptcy you are entitled to “discharge” or wipe out
most types of unsecured debt including credit card debt, medical debt, personal
loans, foreclosure or repossession debt, certain tax debt and more.
Although Chapter 7 can eliminate most or all of your
dischargeable debt, the bankruptcy trustee may sell your nonexempt assets and
distribute the funds to your creditors. In
addition, a Chapter 7 bankruptcy is reported on your credit report for 10
years, which may cause lenders to view you as high risk.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is most commonly used by individuals who
either don’t qualify for Chapter 7 bankruptcy because their income is too high,
they want to catch up on secured debt payments such as a mortgage or car loan
or they have nonexempt assets that would be sold in Chapter 7. Chapter 13 bankruptcy involves a three to
five year repayment plan where you repay some or all of your debt. The amount repay depends upon your disposable
income and your assets. Some people that
file Chapter 13 bankruptcy pay only a fraction of their unsecured debt while
others pay the full amount of their debt.
The Chapter 13 repayment plan requires you to pay all of
your disposable income for the life of the plan, leaving you without any
leftover funds for a period of three to five years. In addition, you are under the court’s
control while in Chapter 13 bankruptcy and must ask permission to buy or sell assets
or incur new debt. Finally, a Chapter 13
bankruptcy will also appear on your credit report for 7 years.
Debt Settlement
Debt settlement is the process of negotiating with each
creditor in an attempt to have the creditor accept a lesser amount in
satisfaction of the debt. Most people
that participate in debt settlement do not qualify for Chapter 7 bankruptcy and
would be required to pay most of their debt in a Chapter 13 bankruptcy. Debt settlement generally requires you to have
a steady income or access to funds. Debt
settlement damages your credit because creditors will normally not settle unless
you are delinquent, the negative impact on your credit score is far less than
if you were to file Chapter 7 or Chapter 13 bankruptcy.
There are several drawbacks to debt settlement. In addition to normally having to pay a
majority of the debt, the amount that is forgiven by your creditors may be
treated as taxable income. Another issue
with choosing debt settlement over bankruptcy is that your creditors are not
required to participate and sometimes choose not to do so.
This article in no way is exhaustive of the benefits and drawbacks
of Chapter 7 and Chapter 13 bankruptcy and debt settlement. The decision to file bankruptcy or debt
settlement is case specific, and as a result, you should consult an experienced
Phoenix debt settlement lawyer and Arizona bankruptcy attorney for the best
solution to your financial problems.
