Chapter 7 Bankruptcy Or Debt Settlement?

Chapter 7 bankruptcy verses debt settlement depends on whether people have the ability or desire to repay their debt. When debt goes from manageable to overwhelming, people often look for ways to eliminate the debt besides ignoring creditors’ constant telephone calls and letters. Chapter 7 and debt settlement are two options people use when seeking financial freedom. Whether people choose Chapter 7 bankruptcy or debt settlement, they have to pay fees. However, that’s where the similarities end.

Chapter 7

Chapter 7 offers people wanting to eliminate debt a financial fresh start. This means that people, often called debtors under bankruptcy law, won’t have to pay creditors. Instead, the bankruptcy trustee collects and sells people’s nonexempt assets, if there are any, and applies the proceeds to the creditors’ claims. Typically, exempt items that won’t be seized are property such as cars, work-related tools and household furnishings. Although there are fees associated with filling Chapter 7, people may not have to pay them. According to the U.S. Courts, if people’s income is less than 150 percent of the property level and can’t pay fees in installments, courts may waive the fees.

Chapter 7: Disadvantages

According the U.S. Federal Trade Commission (FTC), personal bankruptcy is generally considered the debt management option of last resort. The bankruptcy stays on people’s credit report for approximately 10 years and may hinder them from acquiring new homes, cars or credit cards.

Debt Settlement

Debt settlement is an alternative to filing Chapter 7. Typically, people sign up with debt settlement companies. These companies work on people’s behalf contacting creditors and negotiating lower payments. They not only can negotiate with lower payments, but lower interest rates or cancel debts entirely. People pay the debt settlement companies for an agreed number of months and the companies pay the creditors.

Debt Settlement: Disadvantages

Unlike other debt management strategies such as Chapter 7 or debt consolidation, the debt is still unpaid until people complete the number of payments. Unfortunately, working with debt settlement companies doesn’t always add up to financial freedom. Debt settlement companies may pay creditors late or not at all. Also, working with debt settlement companies doesn’t stop creditors from suing—even if they receive continuous payments. People using these companies and want to receive new credit in the future may receive negative marks on their credit. Potential creditors view the indication of debt settlement as old creditors initiating legal proceedings.

Need Debt Help?