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Is Bankruptcy Better Than Debt Settlement?

The Law Office of Marc G. Alster Sept. 30, 2024

The economic instability in the United States has had an immense impact on many Americans' finances. With prices of housing, gas, and groceries skyrocketing, interest rates have also gone up. This means two things: people can afford less and borrowing money from a lender is a lot more expensive now.  

If your current debt is crushing you both financially and mentally, you know you should do something about it. And for many, the only way to get debt relief comes down to either bankruptcy or debt settlement. When you are on the brink of financial disaster, both options can help you regain control. But which one is best? There are many important reasons why bankruptcy is often a better option than a debt settlement.  

If you cannot choose between the two options yourself, it cannot be understated how important it is to get help. The attorney at The Law Office of Marc G. Alster can review your situation and explain if filing for bankruptcy or seeking debt settlement would be a smart choice in your specific circumstances.  

What Is Bankruptcy?  

If you cannot repay your outstanding debt, experienced attorney Marc G Alster Esq. can let you know if you qualify for a bankruptcy discharge, which will allow you to eliminate all or part of your debt and "get a fresh start". Generally, bankruptcy falls into two types (known as “chapters”):  

  • Chapter 7 bankruptcy: When you fully qualify for a Chapter 7 Bankruptcy discharge at the Law Offices of Marc G Alster, all of your assets should fall under the Bankruptcy Code's exemptions which will prevent the appointed Chapter 7 Trustee from liquidating (selling off) any of your assets to pay off your creditors (another words all your assets should be protected). After your Chapter 7 case, all unsecured debts, including medical bills and credit card balances, are discharged. When debts are discharged, you are no longer liable for them.  

  • Chapter 13 bankruptcy: When you file for bankruptcy under Chapter 13, you develop a plan to repay some or all of your secured or unsecured debts. Generally speaking, you will need to have regular income to make your monthly Chapter 13 Plan payments (there are exceptions). Typically, a repayment plan under Chapter 13 bankruptcy lasts from three to five years. When you complete the Plan, any remaining unsecured debts will be discharged.  

While fully qualifying and filing for bankruptcy will allow you to get a much-needed fresh start and forget about creditor harassment once and for all, you should be aware that your Chapter 7 bankruptcy filing will also remain on your record report for up to 10 years, (a Chapter 13 bankruptcy will remain on your record for up to 7 years). While filing for Bankruptcy protection itself, negatively affects your ability to obtain credit in the short run, most people who receive their Discharge Order have a significantly higher credit score with the 3 national credit reporting agencies within one year after filing for Bankruptcy protection.  This is because all of your creditors must report your debt balances to be $0.00 within 30 days of receiving notice of your Discharge Order.

There are many other ways in which debtors can build up their credit scores on file with the 3 national credit reporting agencies, which are alluded to in another article in this website entitled "Rebuilding Your Credit", which article will also be provided to you at your free consultation with Mr. Alster.  

What Is Debt Settlement?  

Filing for bankruptcy may seem like the only way out of debt, but it’s not. Some people also pursue debt settlement as an alternative to bankruptcy. What does it entail? First and foremost, debt settlement is a private transaction between you and your creditors.

Debt settlement occurs when a debtor and their creditor agree to settle the debt for less than the amount owed. This may involve lowering the interest rate or reducing the principal amount. However, debt settlement isn’t a “quick fix” solution as many would like to believe. The process can take up to many years and won’t eliminate all of your debt, in many cases a significant percentage of your debt will have to be paid.  

What’s Better: Bankruptcy or Debt Settlement?  

While both bankruptcy and debt settlement can help you get back on your feet financially, and may erase a certain amount of debt, they are two entirely different approaches to debt relief. So, you might be wondering, which is better, then?  

In the vast majority of cases, bankruptcy is far better than debt settlement with only one exception: when bankruptcy is not an option (e.g., you do not qualify or you cannot withstand the negative stigma associated with bankruptcy), then debt settlement may be a good alternative. However, that’s true as long as:  

  1. You have regular income or substantial sums of money to continue paying off your debts; and 

  1. You are emotionally and mentally prepared to deal with creditors for at least several months to many years (or longer).  

Filing for bankruptcy is generally a better option when any of the following factors exist:  

  • The debt is so large the debtor cannot afford to pay back any of his debt while maintaining a basic lifestyle, without "undue hardship";  

  • The debtor has exhausted other debt-relief options;  

  • The debtor is at risk of losing their home to foreclosure;  

  • The debtor is using or considering using payday loans to make payments on his/her debt;  

  • The debtor is using or considering using his/her emergency or retirement savings;  

  • debtors have lost their employment and do not otherwise have sufficient monthly income that would enable them to repay a minimum of $100 per month to their creditors 

It’s unfortunate to be in a situation where you need to choose between filing for bankruptcy and debt settlement. But if you are struggling to make ends meet, either one of those options may be a necessity. Surprisingly, for many people, the decision to file for Bankruptcy protection is normally the first step for most debtors in rebuilding their credit, since most debtors coming in for their free consultation have already defaulted on their loan obligations and therefore have bad credit. See another article in this website entitled "Rebuilding Your Credit".

Need Help Choosing Between Bankruptcy and Debt Settlement?  

When your debt gets out of control, it may feel like your entire life is put on hold. Getting out from under the crushing weight of debt may not be easy, which is why many people end up filing for bankruptcy or seeking debt settlement. These two options offer a way to manage your debt and even potentially eliminate some of the debt. However, both bankruptcy and debt settlement come with potential implications and drawbacks, which is why you might want to contact an attorney and discuss which option might work best for you. Mr. Alster from The Law Office of Marc G. Alster can answer your questions and address your concerns during a free consultation so you can finally take a deep breath and see a clear path forward.