Debt Settlement Plan vs Filing Bankruptcy

The term Debt Settlement refers to when a creditor accepts less than a debtor owes on a principal balance. With this type of program, debtors make monthly payments into an escrow account over time. The settlement company’s fee is taken off the top of funds paid into the account. Debt settlement may be limited to only unsecured credit cards and personal loans. It does not work with secured debts such as car payments or mortgage payments. Debt settlement will not stop wage garnishments.Debt-Settlement-vs-Filing-Bankruptcy-Coons-Crump-Law-Office
Going through a debt settlement company may not be the best option as it involves a fair amount of risk. If the company goes out of business or if they are unable to settle claims with creditors, there is no guarantee that debtors will get back any of the money that they paid. There are fees to be paid to the settlement company, in addition to the money for paying creditors. Again, there are no guarantees, nor is there is supervision through the courts.
Creditors May Still Pursue Legal Action
Debtors can still be vulnerable to legal action and collection activity, even while making payments into a debt settlement program. The debt settlement companies are not typically attorneys. In some states, they have a local attorney that works for them but does not represent you in court. Creditors can still make collection calls – in fact, those calls often increase. Debtors are responsible for sending letters to creditors citing Federal law in order to stop the collection calls.
When someone stops communicating directly with their creditors the risk of legal action increases. Getting sued exposes debtors to other problems – without an attorney, debtors must file court documents themselves or risk a default judgment. Even if people represent themselves in court it is unlikely they will be able to successfully defend a collection lawsuit. The debt settlement company won’t do it, nor do they appear in court and argue for you. Debtors may also have to pay taxes on the debt that was negotiated on (i.e. if you settled a sum of $100,000 debt for $60,000, you pay taxes on the $40,000 difference).
Bankruptcy May Be the Better Option
In a bankruptcy, debtors may be able to discharge most or all of their debts. Depending on the type of bankruptcy you may be able to get a discharge in a short time with attorney fees paid upfront or through a payment plan made to a trustee for three to five years that would not require any fees upfront. In a three to five year case, the Trustee pays the creditors according to the plan and legal fees are paid through the plan. Some debts such as student loans and recent tax obligations might not be discharged.
Chapter 13 Bankruptcy
In this type of bankruptcy, the debtor will propose a plan to the court. After review, if the plan meets all the requirements set by bankruptcy laws, a Judge will issue an order approving the plan (normally within a few months of the case being filed). The debtor will make monthly payments to the Trustee. The payments are largely dependent on a budget that is done with your attorney.  In some cases, a portion of the payments may be paid to some creditors but not others – and in most cases, this results in actually paying pennies on the dollar on the total debt.
Chapter 7 Bankruptcy
Chapter 7 is different than Chapter 13 in that the debtor will usually receive a discharge within six months of filing. The fees to the attorney are due before the case is filed because the lawyer is dischargeable in the case.  The discharge wipes out credit cards, personal loans, and medical bills.
Bankruptcy Basics
When the case is filed the court sends a court order called an Automatic Stay to creditors. This benefits the debtor in several ways.
  • The debtor is no longer obligated to communicate with creditors. 
  • All communication with creditors is done through the attorney.
  • The court order stops all collection activities, including lawsuits, collection calls, and letters.
  • Any legal proceedings are controlled and handled by the attorney.
  • There are NO tax consequences for discharged debt.
The fact that you filed Bankruptcy will be reflected on your credit report. In our experience, it will have a substantial one-time negative effect. Chapter 7 is reported for 10 years from the date of filing. Chapter 13 is reported for 7 years from the date of filing. However, once the bankruptcy is filed creditors must stop reporting the continuing monthly delinquency on your credit report. This means no more month-over-month negative reporting that occurs when you default on debts.

If you are still interested in a debt settlement plan, you should do your homework. The Federal Trade Commission and Consumer Financial Protection Bureau have excellent resources on these types of programs.   You should also consider reviewing the State Bank Commissioner of Kansas. In Kansas to provide any kind of debt counseling services, you need to be licensed and the State Bank Commissioner has an easily accessible online system to check and see if an agency is currently licensed.   

Bankruptcy is a better option than debt settlement for most people. In our office cases are unique and carefully planned around the debtor’s particular circumstances. We suggest that you call an experienced bankruptcy attorney with your questions about how bankruptcy might work for you. 

The lawyers at Coons & Crump are supportive, competent, and reliable. We want you to experience the relief that bankruptcy can provide. Contact our office to schedule a free, confidential consultation. With convenient office locations in Lawrence, Topeka and Overland Park, we can represent anyone who resides in the State of Kansas.

785-856-8720 (Lawrence)    785-783-2360 (Topeka)    913-353-4044 (Overland Park)

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