Chapter 7 Bankruptcy vs. Debt Settlement

Chapter 7 Bankruptcy vs. Debt Settlement

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No debt relief program is a good fit for everyone.

There are many programs out there that claim to be able to help you get rid of debt. But before you commit to any of them, do your homework so you can make the best decision for you and your future.

Every debt relief option will affect your finances in different ways. Which one suits you will depend the type of debt you have, your current income and your financial goals.

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In any situation, your debt relief plan should:

  • Provide lasting, long-term debt elimination
  • Protect you and your property while you work to get out of debt
  • Be safe and effective so that you don’t go deeper in debt while trying to get out

Using this criteria, let’s take a look at two popular avenues for debt relief: Chapter 7 bankruptcy and debt settlement.

If you are struggling to keep up with massive credit card debt – or debts related to medical bills or personal loans – then you might have explored one of these areas.

Note: If you have some income and own lots of property you want to protect, then a Chapter 13 bankruptcy may be better suited for you.

Debt Settlement

May help: Credit card debt.

Won’t help: Any other type of debt, including debt related to: Medical bills, personal loans, payday loans, car loans, home mortgages.

How it works: In exchange for a fee or percentage of the amount you owe a credit card company, a debt settlement firm will “negotiate” with the company. Their goal is to get the company to accept one smaller lump payment for part of your debt and in return clear the remainder. During their “negotiations,” you will make regular, monthly payments to the company and your money will be stored in an account until you have enough to strike a deal with the credit card company.

Concerns: You must be very careful when dealing with a debt settlement firm. Federal and state regulators have taken action against debt settlement companies for deceptive, misleading and illegal business practices. Problems can also arise if your debt settlement firm goes out of business, as was the case with one Texas-based company. When they went under some customers lost the money they paid and had nothing to show for it. Also, debt settlement cannot protect you from lawsuits, and creditors may continue to contact you during the settlement process, which may take months or even years.

Bottom line: Can you afford to spend money on a debt settlement plan that might not work? Debt settlement firms don’t offer complete security or legal protections for your actions or your money. If this is the right path for you, make sure you are dealing with a reputable company, because otherwise you could spend lots of money and see little or no debt relief.

Chapter 7 bankruptcy

May help: Debt related to: Credit cards, medical bills, personal loans, payday loans.

Won’t help: Although Chapter 7 bankruptcy can protect home foreclosure and car repossession through the automatic stay, it may not be able to address debt stemming from secured debt, like a car loan or mortgage.

How it works: In order to file Chapter 7 bankruptcy you must first pass a means test, which takes a look at your income and debts. If you qualify, you will then begin the bankruptcy process, which mostly consists of filing the appropriate paperwork and documents with the courts. Your bankruptcy lawyer can help you prepare this paperwork and ensure that everything is turned in accurately and on time. In almost every case, you won’t need to appear in court and testify in front of a judge and jury. When you file, the automatic stay will kick in and stop all lawsuits, wage garnishments, repossessions and other collection efforts.

Part of this paperwork will outline your Chapter 7 bankruptcy exemption claims. Each state allows certain exemptions, or property protections. In almost all Chapter 7 bankruptcy cases, there is no sale of any kind of property.

Once your paperwork is filed and you complete the credit coursework, your bankruptcy is finished. The process is designed to work quickly. When you emerge, your debts will be eliminated, and creditors won’t be able to make any claims against you.

Concerns: If you recently filed chapter 7 bankruptcy you may not be able to file again right away. If you own large amounts of property that you want to keep, and depending on the exact laws in your state, you may be better off with a Chapter 13 bankruptcy. In order to file you must pass the Chapter 7 means test.

Bottom line: Chapter 7 bankruptcy was designed to provide swift, complete and legally safe elimination of unsecured debt. It can address multiple types of debt, stop lawsuits, wage garnishment and may even protect your home, car and other property.

Chapter 7 Bankruptcy vs. Debt Settlement

Taking action against your debt

Even if you feel like your debt is out of control, you have options. There are actions you can take to get back your life.

The first step is information. This is your life and your future, so make a decision that’s best for you.

Speaking with a local Chapter 7 bankruptcy lawyer is a great way to get answers to your questions about all types of debt relief. A bankruptcy lawyer can explain the laws in your state and how they might impact you and your debt.

You can get started today by connecting, for no charge, with a local bankruptcy attorney. Simply complete the free case evaluation form on this page, and we’ll connect you with a lawyer near you right away.