Choosing Between Debt Settlement and Chapter 13 Bankruptcy

Consumers with problematic amounts of unsecured debt may find themselves with a difficult choice to make in working towards a solution. The choice before them may come down to a debt settlement program or Chapter 13 bankruptcy. Here are some important points to consider in arriving at your decision.

Many consumers with very serious debt problems have sorted through their options and are left with a decision between two possible debt relief solutions: debt settlement or Chapter 13 bankruptcy. In order to arrive at this decision, at some point they should have considered (and rejected) debt management (also known as credit counseling) and Chapter 7 bankruptcy as possible solutions. If they narrowed their choices properly, they must have concluded that the interest rate reduction, payment consolidation and financial counseling offered in a debt management program were insufficient to realistically free them from their overwhelming debt. In addition, they must have realized that they wouldn't be able to pass the two-part "means test" that has become part of Chapter 7 bankruptcy law since the 2005 reforms.

The choice of either debt settlement or Chapter 13 bankruptcy involves damage to the consumers' credit, although it must be stated that the damage from debt settlement falls far short of the 7 to 10 years of complete credit ruin that accompanies bankruptcy. But it must be clear to consumers that, for them, the benefits associated with either of these debt relief solutions need to outweigh the penalty of the credit damage.

Debt settlement programs can typically negotiate the balances on your unsecured debt down to just 40% to 60% and eliminate interest charges, normally enabling you to pay off your debt completely in just a few years. In contrast, consider a typical scenario in which a consumer with a significant amount of unsecured debt is able to make only the minimum monthly payments on each account and is paying very high interest rates as well. In this type of a situation, it is not unusual for the consumer to make payments on this debt for 25 years or even longer before the debt is completely paid off. With such a dramatic difference in the time required to pay off the debt, it is clear why debt settlement has emerged as one of the best unsecured debt solutions available.

But there still exist some extreme situations where even the substantial benefits offered by debt settlement are insufficient to realistically resolve the debt problem. In such cases, the consumer may need to opt for a Chapter 13 bankruptcy. It will include a repayment plan for up to 5 years and only the debts included in the plan need to be repaid. It will also require the payment of higher attorney fees than before, a direct result of the new attorney liability included in the 2005 bankruptcy reforms.

If the downside of a Chapter 13 bankruptcy is too steep for you, then debt settlement can provide considerable debt assistance but with less damage to your credit. But when even debt settlement's benefits seem inadequate, then you may have no other choice but to find a good attorney to file for Chapter 13 bankruptcy. This ultimately may be your best path to credit card debt relief.

Jackson Roberts is a debt counselor for Right Start LLC who regularly contributes articles on the subject to assist those in need of debt relief help. He has also authored several articles that deal specifically with credit debt settlement.