How bankruptcy and debt settlement differ

When consumers in Austin, Texas struggle with debt, they may first consider bankruptcy. However, another way to get out of debt is debt settlement. They solve a similar issue, but there are pros and cons to each solution.

Bankruptcy

Bankruptcy is a legal procedure to discharge unsecured debts, or debts without collateral, such as credit card bills. The most common type of bankruptcy is Chapter 7, which sells nonexempt assets, such as second homes or jewelry, to pay creditors. This is commonly the fastest bankruptcy type and can be completed in around six months, but the consumer must pass the means test.

Chapter 13 bankruptcy clears some debts through a court-approved payment plan that allows gradual payments over several years. The consumer doesn’t have to sell assets, but they will need sufficient income and they can not exceed the debt limit. They must stay current on mortgage and vehicle payments and make timely payments to the trustee.

Debt settlement

Debt settlement is among the collection alternatives to settle debt for a lesser amount than owed. The reduced debt amount is commonly up to 50% in exchange for making a lump sum payment to the creditor.

While the consumer may hire an agency, they often charge a fee, which could equal up to 25% of the enrolled debt. However, they can not legally ask for the fee until the creditor agrees to a settlement.

They may ask the consumer to stop making payments to convince the creditors to settle, rather than risk getting nothing. However, a creditor isn’t obligated to settle, and not paying debts could risk the creditor suing the consumer. Debt settlement is only for unsecured debt and impacts credit, but it is simpler than bankruptcy.

Debt settlement may benefit some consumers in some situations and bankruptcy in others. Evaluate your options before making a decision.