Debt Settlement vs. Bankruptcy: The Facts

Debt Settlement is a non legal method by which a consumer seeks to settle unsecured debt with one or a number of unsecured creditors such as Credit Card Companies. There are many companies that offer this service and purport to guarantee 50% or better settlement figures. These companies charge anywhere between 10-15% of the total debt as a fee. They will set up an escrow account and you will make payments into that account over a period of up to sixty (60) months. The first payments go towards the payment of the fees to the company. After that, the escrow account balance builds every time the consumer makes a payment into it. This process continues until the consumer has built up enough of a balance to make lump sum payments to the various creditors.

During this process, the consumer is exposed to all of the legal remedies that the creditor would normally have under state law to pursue the debt. This means harassing phone calls, collection letters, both at home and at work. As well, the creditor is free to pursue legal remedy through a court judgment while the consumer is making payments into the escrow account. The important thing to remember with the debt settlement program as such is that no money will be paid to a creditor until the escrow account balance has been built up to the point where the debt can be settled in a lump sum.

Negative Credit Reporting will occur and via the universal default provisions in most credit card agreements, the consumer will lose access to other lines of credit that are not enrolled in the debt program.

Chapter 7 Bankruptcy and Debt Settlement:

In a Chapter 7 Bankruptcy, a Debtor is provided complete relief from unsecured debt. This means that the debt is dissolved and the Debtor pays NOTHING to the creditors.  The petition and Schedules are filed, the debtor attends a brief meeting with the Bankruptcy Trustee thirty days later, and within 60 to 90 days after, the case is dismissed and the debt is discharged as to the debtor.

While the Debtor is in Chapter 7 Bankruptcy, the debtor is protected by the automatic stay. This is to say that no creditor may do anything which might be construed as an attempt to collect a debt. This means no phone calls and no harassing letters. Once the case is dismissed, and the debt is discharged, the creditor is barred from further attempts to collect the debt that has been discharged.

The Bankruptcy is a Public Record and will appear on the Debtor’s Credit Report for 10 years. This is not to say that the Debtor cannot work to rebuild their credit during that time, but it is important to understand that the record does not go away for that period of time.

Chapter 13 Bankruptcy and Debt Settlement:

Chapter 13 Bankruptcy is essentially the legal equivalent of the above detailed debt settlement program but with some important distinctions. In a Chapter 13 Bankruptcy, just as a Chapter 7, the Debtor is protected by the Automatic Stay, so there will be no harassing creditor calls.

In Chapter 13, “The Reorganization” the Debtor will analyze his or her monthly budget with their attorney to determine what the level of disposable income is. This will be what is left over after the debtor has paid all secured and essential expenses. This is the amount that will be paid to satisfy the debts of unsecured creditors. In such cases, we see “15-20% Plans. The debt is settled through payments to the Bankruptcy Trustee who deals with the creditors on your behalf.

Chapter 13 Bankruptcy will remain as a Public Record on your credit report for seven years. As above, this is not to say that you cannot do things to rebuild your credit, but it is important that a consumer understand that this is a consequence.

If you have questions about which program might be best for you, it is best to speak with a Bankruptcy Attorney in San Diego to determine which is your best option. We are available Monday-Friday 9:00-5:30, and Saturdays 9:00-12:00. Please call 858 499 8951 to schedule a time to speak with a Bankruptcy Attorney.

The above is meant to be a guide and to give a consumer some things to think about when evaluating these choices, it is not intended to be legal advice. For advice that is directly relevant to your situation, you will need to consult one of our attorneys.