Bankruptcy vs. Debt Settlement

When you are overwhelmed by debt, it can be a stressful experience that leaves you actively searching for relief. The quality of your future depends on how you choose to move forward in this moment. Bankruptcy and debt settlement can both provide viable options for relief, depending on your situation. However, it is important to talk with a lawyer and understand bankruptcy vs debt settlement so you can determine the right options for you.

Symmes Law Group provides you with trusted counsel when you are uncertain about which process to use. We are also committed to protecting your interests so you are not taken advantage of while you are trying to reduce your debt. An experienced Seattle consumer bankruptcy lawyer can protect your rights while negotiating a beneficial outcome for your circumstances. 

What Is the Difference Between Bankruptcy and Debt Settlement?

Bankruptcy and debt settlement are two sides of the same coin. They both provide relief from the burden of debt. However, the way they accomplish it is very different and varies in effectiveness. It is important to understand each one before you move forward, as they both have considerable ramifications for your debt, credit, and overall future. 

About Bankruptcy

Filing for bankruptcy provides individuals with two options. These are known as Chapter 7 bankruptcy and Chapter 13 bankruptcy. If you file for a Chapter 7 bankruptcy, most, if not all, of your debts can be wiped away, and you can start fresh. However, in a Chapter 13 bankruptcy, you will only have to make payments for 3-5 years, and in many situations, discharge whatever you have not paid off at the end of the payment plan. Your resources and debts will often dictate which you file for. 

About Debt Settlement

Unlike bankruptcy, a debt settlement program does not allow you to start fresh. The goal of debt settlement is to make your payments more affordable by working with a third party or debt settlement lawyer to negotiate your debts with your creditors and agree upon an amount you can pay. This sum is generally below the full debt value. However, a debt settlement plan does not allow for any sort of discharge prior to you paying off a high percentage of your debt.

Advantages and Disadvantages of Filing for Bankruptcy

When looking at the pros and cons of filing bankruptcy, one of the biggest advantages is that it enacts an automatic stay. An automatic stay means that creditors cannot contact you and try to collect on your debts. Approved bankruptcy petitions also eliminate or minimize your liability for your debt. You are also allowed certain exemptions, which can reduce the loss of assets. People often find that their credit scores improve or recover quickly. Individuals can also resolve their cases for less than they owe, and even establish new credit afterward.

Despite the many advantages of bankruptcy, it does also have some drawbacks. Attorney and filing fees for bankruptcy can be expensive and still leave you with a debt to repay. Additionally, while the damage may not be lasting, your credit score will still be impacted when initially filing for bankruptcy. Filing for bankruptcy also remains on your credit report for a significant amount of time. In Chapter 7 bankruptcy, you could also risk losing your home if there is enough equity in it to settle your debts. 

Understanding the Bankruptcy Process

While the scope of Chapter 7 and Chapter 13 bankruptcy is different, they follow similar processes. Individuals will first be required to complete a means test to determine whether or not they are eligible to file. If allowed to move forward, they will need to provide all relevant documentation to demonstrate their financial situation. Those filing for bankruptcy will also need to complete credit counseling and financial management classes, typically online, at the beginning and end of the process.  

Once bankruptcy petitions have been filed, individuals must attend a Section 341 meeting over zoom with their creditors and assigned trustee. The trustee will review the bankruptcy petition and make sure there are no further assets to be liquidated. If a discharge is granted, debts will be discharged within 60 days of the Section 341 meeting in chapter 7. Individuals should work closely with a Seattle bankruptcy lawyer throughout the process to understand additional steps that may be required based on their situation and the type of bankruptcy petition.  In a chapter 13 bankruptcy, plans can be 36-60 months until a debtor gets a discharge of their debts.   

Advantages and Disadvantages of Debt Settlement

There are also pros and cons of debt settlement. One of the benefits of debt settlement is that it can decrease your debt while helping you avoid filing for bankruptcy. This can provide you with some relief, so payments are more manageable. The overall process takes less time, so you can potentially move forward faster. Debt settlement can also help you avoid further contact with creditors after a payment plan has been created. 

There are also many disadvantages to debt settlement. Creditors may refuse to settle on anything less than what you owe. You could also be subject to fees or end up being haunted by a mountain of debt that you never fully get out from under.  Debt settlement could also cause additional and lasting damage to your credit. When working with a debt settlement company, you may run the risk that they may not take sufficient action, and you may end up in a more challenging financial situation. 

What to Expect from the Debt Settlement Process

Settling debt requires negotiating with creditors to arrive at an amount that can be repaid. This is often less than the total amount that is owed. While you can handle this process yourself, most people hire a debt settlement company to handle it for them. During the debt settlement process, you will often be required to cease payment on your debts to signal financial hardship. While this can help with the negotiations that follow, it can also create additional problems.

Once a settlement has been reached with your creditors, you will begin to make payments on the agreed-upon sum. The amount of time you have to repay the remaining debt is determined during negotiations. If you can make any initial lump sum payments, that is also recommended. Additionally, debt settlement companies typically charge high fees for their services, so you may be paying for these simultaneously. 

You also have the option of working with an attorney in the Seattle area instead of a debt settlement company. Debt settlement can pose a number of challenges, but a lawyer can provide experienced guidance that protects you and makes sure you are not taken advantage of.

Types of Debts That Cannot Be Eliminated Through Bankruptcy or Debt Settlement

Bankruptcy and debt settlement typically focus on discharging unsecured debts. However, certain types of debts cannot be eliminated in either process. These debts are excluded, and you are required to remain financially responsible for them until they are paid off.

Some common debts that are considered non-dischargeable according to 11 USC 523 include:

• Tax obligations
• Educational loans
• Personal injury penalties
• Government taxes or penalties 
• Spousal support
• Child support

How an Attorney Can Help with Non-Dischargeable Debts

Your lawyer can provide clarity on these and other exceptions that may apply to your situation. They can also work with you to figure out how to handle non-dischargeable debts and identify effective repayment strategies so you do not face undue hardship. With their help, you can feel confident about moving forward.

Factors to Consider When Determining Which Option is Right for You

Every individual’s situation is different, and what works for one person may not work for another person. As such, you should consider several factors when determining if bankruptcy or debt settlement is right for you.

Consulting with a lawyer is one of the most effective ways to identify the right solution for your circumstances. During an initial consultation, they will learn more about your debt, goals, and the impact on your life. Below is a closer look at the key points that you should consider.

Your Financial Situation

The extent of your debt and assets will strongly influence your options. For example, if you have a moderate amount of debt with steady income and assets, debt settlement or Chapter 13 bankruptcy may be a viable option since you can make payments. However, if you have high debts with limited means of repayment, Chapter 7 bankruptcy could help you wipe out all dischargeable debts so you can start fresh. Your financial situation will play a large part in determining the right option for you. 

Relief Timeline

Bankruptcy and debt settlement have very different timelines. Depending on your needs, this could play a big part in which option you choose to pursue. Chapter 7 bankruptcy is often resolved fairly quickly, Chapter 13 bankruptcy usually takes 3-5 years, and debt settlement can take even longer, depending on your situation. Your financial situation, coupled with how quickly you need to reduce your debt, can factor into which option you choose.

Impact on Your Credit

Regardless of which option you choose, your credit will be impacted. How much it will be affected will depend on which option you move forward with. Credit often recovers faster with bankruptcy than with debt settlement. Individuals with lower credit scores are also most likely to see an improvement in their credit scores. However, those with high credit scores may experience a negative impact for a period of time. While this drop can be improved, it is worth considering the state of your credit from the outset. 

Level of Protection

Bankruptcy provides greater protection than debt settlement. Because of the automatic stay, which is effective from the minute you file for bankruptcy, it means you are protected from creditors taking action against you. Debt settlement does not provide such options, so creditors can continue to harass you throughout the process. They can also garnish your wages or sue you for nonpayment. This is definitely a factor to consider when examining your options.

Alternatives to Bankruptcy and Debt Settlement

Depending on your financial situation, there may be other debt relief solutions you can pursue instead of bankruptcy or debt settlement. Some alternatives to debt settlement include debt consolidation, credit counseling, and balance transfer cards. As mentioned earlier, you can also negotiate with creditors yourself. These options can provide you with some additional avenues for relief that may have less of an impact on your credit and life than bankruptcy or debt settlement. 

It can be beneficial to explore all of your options before deciding which path to follow. Seeking trusted advice may also be helpful as you try to identify what alternative option may be suited to your situation, and what initial steps you should take. 

Why It’s Important to Discuss Your Options with a Lawyer

With several options available for debt relief, identifying the right path forward can be overwhelming. When you hire a lawyer, they will sit down with you and help you find the option that is right for you.

Greater Protection Than Working with a Debt Settlement Company

Unlike debt settlement companies, a lawyer will provide greater protection so you are not at risk of ending up in deeper financial trouble. Whether you choose bankruptcy or debt settlement, your lawyer will help you handle the logistics of the process, complete applicable forms, conduct negotiations, and advocate for you. 

Detailed Guidance Through Complicated Processes

Bankruptcy and debt settlement can both be complicated processes, and lawyers have the experience needed to communicate with creditors or the court on your behalf. They will also help you gather all the documents you need to demonstrate your financial situation, and will help streamline the bankruptcy or debt settlement processes so you can get relief as soon as possible.

Contact an Experienced Seattle Attorney About Your Debt Relief Options

Symmes Law Group is ready to help you file for bankruptcy or settle your debts. When you work with us, you can be confident that you will receive exceptional service that protects you and your interests. We provide trusted counsel that ensures you can breathe easier going forward. For a free consultation with a Seattle debt relief attorney near you, contact the Symmes Law Group today.