Under the new bankruptcy rules, a lot more people will be forced into Chapter 13 bankruptcy versus the preferred Chapter 7. The major difference, of course, is that Chapter 13 represents the worst of both worlds. You get the giant B-word tattooed to your forehead (well, your credit report anyway, which amounts to the same thing), PLUS you get to pay back a big chunk of the debts included in the bankruptcy. At least with Chapter 7, you get to wipe away the unsecured debts and truly start fresh. Not so with Chapter 13, where you are on the hook for FIVE YEARS. With many more consumers being faced with Chapter 13, it’s appropriate to compare this form of judicial torture to the alternative of debt settlement.
In many respects, debt settlement is an informal version of Chapter 13, since a percentage of the debt is paid back over time under both of these approaches. However, bankruptcy is always a matter of public record, whereas debt settlement is a private matter between you and your creditors.
Let’s compare these two methods of dealing with problem debt across a variety of important factors:
Average percentage of debt to be repaid: 30% to 50% in both systems.
Duration of program: 5 years with Chapter 13, versus 6 months to 3 years for debt settlement, depending on the monthly budget and other available financial resources.
Who has control over the program: With Chapter 13, the court has control. Debt settlement is controlled by the consumer.
Privacy: Chapter 13 becomes public record, while debt settlement is a private out-of-court matter.
Impact on credit: Bankrutpcy remains on the credit report for 10 years, and may affect future job or loan applications beyond that. With debt settlement, negative remarks remain on the credit report for up to 7 years, but most consumers recover credit-worthiness within 1-2 years after finishing the program.
Creditor lawsuits: These are blocked by bankruptcy, and this is the one area where bankruptcy excels. However, with debt settlement, lawsuits can normally be avoided through the negotiation process.
Payment flexibility: With Chapter 13, the court determines the monthly payment, and that amount is fixed for 5 years, leaving the consumer with no flexilibity to make adjustments for unexpected expenses. Debt settlement is handled at the pace of the consumer and is very flexible in terms of funding structure.
Living expenses: In Chapter 13, allowable living expenses are determined by the court based on IRS schedules. With debt settlement, living expenses are rarely disclosed to creditors.
Costs (fees, etc.) for professional assistance:
Chapter 13: $1,200 to $1,800 average, normally paid up front; will probably increase under the new law.
Debt Settlement: $3,000 to $5,000 averages spread over 10-18 months; may be much higher.
Costs (fees, etc) for do-it-yourself approach:
Chapter 13: Not recommended.
DIY Debt Settlement: $397 for audio-CD training and follow-up coaching
So it’s pretty obvious from the above that debt settlement is an attractive alternative to Chapter 13 bankruptcy. The next question is whether to hire a third-party debt settlement company or to negotiate with your creditors on your own. There are some important reasons why the do-it-yourself approach is superior to paying $1,000s to a third-party debt company. Click the link in the upper left of this page to download a free 32-page report that goes into more detail.