Chapter 13 bankruptcy often provides several advantages over debt settlement:
Legal Protection: Automatic Stay: Filing for Chapter 13 bankruptcy immediately triggers an automatic stay, which halts all collection activities, including lawsuits, wage garnishments, and foreclosure actions. Debt settlement does not offer this legal protection. In most cases, debt settlement firms will not advise you of this problem. Several months ( and several hundred or thousands of dollars later) one or more of the creditors can unilaterally decide that they no longer want to participate in the debt settlement proposed, and then file a civil action against you. A Bankruptcy filing would immediately stop all of the unsecured creditors from adding any funds to what is owed, and also stop all creditor collection actions, lawsuits, garnishments, bank attachments, repossession(s), foreclosure, etc.
Structured Repayment Plan: In Chapter 13, you propose a repayment plan where you pay back a portion of your debts over 3 to 5 years as per court approval. This structured approach can be more predictable than the variable outcomes of debt settlement negotiations.
Debt Discharge: Upon successful completion of the Chapter 13 plan, remaining unsecured debts can be discharged, which means you're no longer legally obligated to pay them. Debt settlement might not result in complete discharge of all debts, and any forgiven debt could be considered taxable income. A Bankruptcy Discharge is not a taxable event under the Internal Revenue Code. The amount of debts that are discharged are not considered to be taxable income as they would be if a debt were "settled" outside of a Bankruptcy case.
Interest and Penalty Stops: Once you file for Chapter 13, interest and penalties on many types of debts can stop accruing, which isn't the case in debt settlements where interest might continue until the debt is settled.
Home Retention: Chapter 13 can prevent foreclosure by allowing you to catch up on mortgage arrears over the life of the plan. Debt settlement does not offer this protection.
Credit Impact: While both options can negatively impact your credit, Chapter 13 shows a commitment to repaying debts over time, which some creditors might view more favorably than simply settling debts for less.
Creditor Harassment: Debt settlement might not stop aggressive collection efforts unless each creditor agrees to the settlement, whereas Chapter 13 immediately stops all creditor communication through the automatic stay.
Comprehensive Solution: Chapter 13 can deal with multiple types of debt simultaneously, including secured and unsecured debts, whereas debt settlement usually tackles one debt at a time or specific types of unsecured debt.
However, there are considerations:
- Cost: Chapter 13 involves attorney fees, court costs, and trustee fees. In most cases these fees and costs are substantially lower than fees and costs related to debt settlement.
- Duration: The process of Chapter 13 can be up to 60 months, whereas some debt settlements can be negotiated relatively quickly. However, overall a Chapter 13 bankruptcy offers the most comprehensive debt relief.
- Eligibility: Not everyone qualifies for Chapter 13, particularly if their income is too low or too high, whereas debt settlement is more broadly accessible.
In summary, while debt settlement can reduce the total amount paid on debts, Chapter 13 bankruptcy provides a more structured, legally protected path that can preserve assets and provide a fresh start once completed. The choice depends on individual circumstances, goals, and the specific nature of one's debts.
Disclaimer: This article is not intended to be considered "Legal Advice." It is provided as general information to help consumers decide if bankruptcy may be a good option. Always consult with a licensed, experienced bankruptcy Attorney before proceeding with a bankruptcy case, or if you have legal questions.