How does Bankruptcy compare to Debt Settlement?
By Stephen T. Craig, Bankruptcy Attorney
Advantages of Debt Settlement over bankruptcy: You may not qualify for Chapter 7 bankruptcy if you earn too much money. And, you may feel better knowing you paid your creditors something.
What is Bankruptcy?
Bankruptcy is a legal proceeding in which a person who cannot pay his or her debts can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law. There are two types of bankruptcy that apply primarily to consumers, Chapter 7 and Chapter 13. Each is a separate option.
The Pros and Cons of Filing Chapter 7 BankruptcyWhat is Chapter 7 Bankruptcy Chapter 7 is known as “straight” bankruptcy or “liquidation.” In a bankruptcy case under Chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a Chapter 7 bankruptcy is to wipe out (discharge) your unsecured debts in exchange for your giving up certain property which exceeds certain limits called "exemptions". "Exempt" property is property which the law allows you to keep when you file bankruptcy. In most cases, all of your property will be exempt . But property which is not exempt is sold, with the money distributed to creditors. If you want to keep property like a home or a car and are behind on the payments on a mortgage or car loan, a Chapter 7 case probably will not be the right choice for you. That is because Chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt. Pros of Filing Chapter 7 Bankruptcy You can eliminate all of your unsecured debt in one move. Cons of Filing Chapter 7 Bankruptcy The fact that you have filed bankruptcy will be on your credit report for up to 10 years. However, if your credit is already poor, than it probably won't make your credit any worse. Chapter 7 only applies to lower income individuals who can show that after paying their monthly living expenses, there is nothing left over to pay credit cards and other secured debt. Also, if your personal and/or real estate is not “exempt” the Court can take it to sell it to pay creditors. The Optimal Candidate for Filing Chapter 7 Bankruptcy You are an optimal candidate if your income is fairly low, you do not have much in terms of assets, and you are unable to pay your debts as they come due. If you are a good bankruptcy candidate, go to our bankruptcy attorney referral page. |
The Pros and Cons of Filing Chapter 13 BankruptcyWhat is Chapter 13 Bankruptcy? Chapter 13 is called “debt adjustment.” In a Chapter 13 case, you are required to make one monthly payment to the Chapter 13 Trustee, to repay some portion of the debt you have. You file a “plan” showing how you will pay off some or all of your past-due and current debts over three to five years. A Chapter 13 is used for individuals or couples with high income, tax problems or face foreclosure. Pros of Filing Chapter 13 Bankruptcy You force a payment plan on your creditors that works for you. You are not required to repay 100% of your debt. In fact, some plans call for payment of less than 10 cents on the dollar. Cons of Filing Chapter 13 Bankruptcy There are many downsides to a Chapter 13. You have to propose a repayment plan and a budget to the Chapter 13 trustee, who is strict. You go to a hearing where the Trustee or their attorney examines your budget and almost always tries to squeeze more out of you. You are asked to justify what you spend your money on each month. The Trustee gives you very little room for error, so if you have an emergency expenditure, you may get behind on your monthly Chapter 13 payment. What happens to so many people is that their Chapter 13 case gets dismissed and they get thrown back to the “wolves” – their creditors. Now they have a “bankruptcy” notation on their credit, but they never got the benefit of a discharge of debts! The last time we checked, the percentage of Chapter 13 filers who successfully completed their plan was less than 40%! Also keep in mind that when you file a Chapter 13, you must include all of your credit cards. You cannot leave one or two out for convenience purposes (e.g., getting a plane or hotel reservation). Do you really want to have a hearing about your spending habits, or would you rather talk these matters over in private? Do you prefer the Court to decide what you must pay each month, or would you rather tell us what you can afford? Do want the Court in your affairs for the next 3-5 years? Do you want to have to justify what you spend your money on each month? Probably not, and that is why I only recommend a Chapter 13 only if you face foreclosure or you have serious tax problems that can_t be handled in a Chapter 7. The Optimal Candidate for Filing Chapter 13 Bankruptcy Chapter 13 is probably the best solution if: you own your home and you are in danger of losing it to foreclosure, but you could get caught up if given time; you are behind in your automobile payments, but can catch up if given time; you have valuable nonexempt property which you would like to retain and you can afford to pay creditors from your income over time; you have debts which are dischargeable in Chapter 13 but not Chapter 7 (e.g., debt incurred through fraud); you owe the IRS or the state for taxes. In some cases, if you have high income and an ability to repay your debts over time, you may not be permitted a discharge in Chapter 7 and Chapter 13 is your only bankruptcy option. In this case, be sure to consider debt settlement as an option as well. |
