Debt Settlement Vs Bankruptcy – Which Can You Afford?


Your bills have piled up and have not been paid for several months. The bill collectors have started to call. You’ve thought about trying to consolidate some of your debt but it’s just too expensive. There wouldn’t be any money left over in your budget for basic necessities like rent and food. You’ve narrowed it down to either bankruptcy, which you have heard of but never really explored, or debt settlement, which sounds attractive, but all the details haven’t been uncovered. A tight budget and savings accumulated will play a major role in whether it’s more affordable to go forward with bankruptcy or debt settlement. Each process has it’s own potential pitfalls and benefits. It’s up to you to decide what’s best for your budget. Read on to learn more about the different costs associated with each plan of action.

Debt settlement is considered the lesser of two evils for many reasons. First, you will wind up paying back about half of your debt to the companies you have accounts with, usually over a five year period. With debt settlement programs, a lawyer is usually hired as the individual who will work with your creditors to settle or pay off your accounts at a much lower amount. You’ll normally have to pay a few hundred bucks for this service up front and then monthly fees are taken from your bank account and transferred to an escrow account until enough cash has built up for your attorney to try and negotiate a lower payment with your creditors. Of course the sooner money piles up in your escrow account, the sooner a settlement can be reached.

The good thing about this is low, more affordable monthly payments can be made to your escrow account. If the payments are too low, it could take forever for your lawyer to be in a position to settle. The problem is if the lawyer waits too long to settle or if your creditors reject your attorney’s offer, the creditors can sue you and initiate legal action to take the monies you owe. Your paycheck could be garnished, and your bank account emptied, leaving you with nothing. Debt settlement works well and is a great option if you can chalk up aproximately half your debt within about a year. If not it can turn into an expensive waste of your hard earned money. In that case, bankruptcy would become the more affordable and safer option.

For most, filing bankruptcy is a last resort, particularly because it stains your credit report and some of your private information becomes a public file. Not only that, your credit score could drop a few hundred points. So why would anyone even think of doing a bankruptcy in light of all these issues? It’s affordable and it can be the first step back to financial freedom.

There are two common types of bankruptcy, which are Chapter 7 and Chapter 13. In Chapter 7 bankruptcy you are usually allowed to keep a certain dollar amount of specific personal items. This amount varies depending on what state you live in. For example, you may be allowed to keep up to $5,000 worth of personal items such as books, clothing, etc. Anything over that amount could be liquidated and the monies split and paid to your creditors. Check the rules for your state. There is the possibility that you could lose some of your assets in this situation but if you don’t own much, you’re not likely to lose anything. Once you go through a Chapter 7, your debt is wiped out. If you own property or have significant assets you want to protect with an ability to make consistent monthly payments, a Chapter 13 bankruptcy would cost more money, but allow you to keep your property and assets.

In a Chapter 13 bankruptcy, you would agree to pay back your debts over a three to five year period at a rate you can afford, based on your salary. This plan is affordable because it is based on a reasonable fraction of your income and usually this is only approved if you can really afford to pay back your debts.

Bankruptcy lawyers often give an initial free consultation and legal fees will range anywhere from $1000 to $2000 dollars. This is very reasonable if your debt is much greater than this amount. If you can’t afford the legal fees, you can file bankruptcy on your own, usually for a few hundred dollars however if you’re not savvy in legal terminology and procedures, you could make a mistake somewhere along the line and lose your valuables in the process.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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