The Choice between Bankruptcy and Debt Settlement

As credit card issuers continue to raise fees, interest rates and payment requirements a growing number of struggling card holders are being force to consider options for debt relief. For many, the choice can come down to two options; bankruptcy and debt settlement. Each has advantages depending on the personal circumstances of the consumer. Let’s take a look at bankruptcy first: The most common bankruptcy venues utilized by consumers are chapters 7 and 13. Chapter 7 is a liquidation of assets and was an extremely popular means of debt relief prior to the reform act of 2005, known as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The act effectively made it difficult for consumers to opt for liquidation of assets, instead forcing them toward Chapter 13 filings. The challenges to filing for a chapter 7 include means testing, higher fees and increased costs and risks for those assisting consumers with the filing. Should a consumer be granted a chapter 7 filing, they cannot file again for eight years and are limited in filing for other legal remedies for several years. As before the passage of BACCPA, the filing stays on the consumer’s credit report for ten years. Other disadvantages are that the filing is a public record and can be accessed by anyone with interest and that bankruptcy filings are posted in local papers for the perusal by neighbors and other members of the local community. Another affect of filing bankruptcy is that many employers now check the credit history of prospective employees which could have an influence on future employment potential for the consumer. Chapter 13 filings, which now make up the bulk of bankruptcy filings, are considered “wage earner plans” where the debt amount is reduced based on the consumer’s ability to pay, and a plan is set up so that consumers pay their debts in three to seven years. The repayment plan is often overseen by an official of the court who can dictate consumers’ spending while they’re in the plan. As with Chapter 7, Chapter 13 filings go on a credit report, are matters of public record, and are available for review by anyone, including employers. The difficulty and resistance to the invasiveness of chapter 13’s is evidenced by the exceedingly high percentage of consumers that enter bankruptcy workout plans and then don’t complete them. A recently published white paper by the United States Organization for Bankruptcy Alternatives suggests that the completion rate is much lower than other debt relief options with only 20% to 25% of consumers making it through the workouts in their entirety. Bankruptcy as an alternative for most consumers has become much more limited since BAPCPA was passed in 2005. Estimates are that as many as 800,000 US households have been prevented from filing bankruptcy in the last few years since the bill’s enactment. Consumers must also go through counseling services (regardless of whether or not they enroll in debt management programs) prior to filing for bankruptcy. The National Foundation for Credit Counseling estimated that their members provided 1.26 million education sessions for bankruptcy in 2007. The best representation of what debt settlement has to offer was recently released in a study on the debt relief option out of Southern Methodist University. In the words of the team which conducted the study, debt settlements "…create the greatest consumer welfare of any approach." The study, which covered 4,500 randomly selected consumers, found the following: 1) Cancellation rates of 60% over two years were much better than the speculated rate of 85% within one year. In fact, that rate is similar or better than other subscription based service industries, such as mobile telephone and cable television companies, which have Better Business Bureau certified members. The 40% of debt settlements being seen through to completion is almost double the amount of consumers that complete chapter 13 workouts. 2) Debt settlement offers as a rule came in under 50% of the original balance of debt, an improvement over the 60-60 (60% percent of debt balances paid off in 60 months) rule and other forms of debt relief, generating significant consumer benefits. 3) Debt settlements can include credit cards, department store debt, unpaid medical bills, unpaid utility bills, and many other forms of unsecured consumer debt. 4) Debt settlement provides immediate relief to consumers, reducing payments on all debts in process by approximately 50%. 5) Balances are typically paid off within 48 months, one to two years faster than bankruptcy workouts. 6) Debt settlement has an increasingly higher value to customers with higher account balances and higher total debt, potentially saving millions of dollars for consumers when compared against the full payoff of balances by making minimum monthly payments. 7) Once “fair share” payments are taken into account for bankruptcies and credit counseling fees payments for a consumer account can exceed 29% of the consumer debt, levels which the study calls “exorbitant.” Other benefits of debt settlement accrue from what is not included. Debt settlements do not include: * The filing of a public record, accessible to anyone that cares to take the time to file for itrn* The filing of public noticern* A bankruptcy on your credit report for up to ten yearsrn* An official of the court overseeing your spending Neither form of debt relief is the perfect answer for everyone but indebted consumers are increasingly finding that debt settlement can provide optimal results without the disadvantages of filing bankruptcy. Be sure to consult a professional with experience in both solutions to determine which one is the best for you.