Types of Programs
a. Bankruptcy. The two most common forms of consumer bankruptcy are Chapter 7 and Chapter 13. Under a Chapter 7 bankruptcy, commonly referred to as “total liquidation,” the consumer may discharge most of their debt (with taxes and student loans being the major exception). Under a Chapter 13 bankruptcy, referred to as a reorganization of debt, the consumer presents a plan for repaying a portion of their debts to the bankruptcy court.
b. Debt Settlement. Debt settlement involves contracting with a third party debt settlement company or law firm / attorney to work towards a resolution of the debt obligation by negotiating discounts with the consumer’s creditors after the consumer defaults. Often, default is a prerequisite because it gives the third-party leverage in negotiations. CAUTION: A debt settlement company or attorney should never tell you to default if the debt is valid and there is no dispute, and you should be skeptical about their services if they do.
Type of Debt Serviced
a. Bankruptcy. Bankruptcy may completely discharge or reduce most types of debt, including secured and unsecured debt and medical bills. If secured debt is discharged in a Chapter 7, the property must be returned to the lienholder. In most cases student loans and taxes cannot be discharged.
b. Debt Settlement. Most debt settlement companies will only deal with unsecured consumer debt. This may include medical bills, but medical bills, unlike credit card debt, are typically more difficult to negotiate. Business debt may also be negotiated through a debt settlement program, but settlements are usually more difficult and business debts don’t fall under the protection of the Fair Debt Collection Practices Act. Taxes, student loans, and government-backed loans (e.g. SBA loans) are not usually included. CAUTION: If a debt settlement company tells you they can settle business debt, taxes, student loans, or government-backed debt, be cautious and ask serious questions.
Cost of Programs
a. Bankruptcy. The cost of bankruptcy varies significantly by geographic region, attorney or law firm. Because Chapter 7 requires significantly less work, it is usually much cheaper than a Chapter 13. An attorney may also be compensated through the plan itself, so even though it is likely to be more costly than a Chapter 13, the attorney may be more willing to accept the case for a smaller amount down because they may receive the remainder of their fees through the plan itself. The court filing fee for a bankruptcy is about $300.00.
b. Debt Settlement. Regulations (the “TSR”) went into effect in 2010 that limited the amount that debt settlement companies could charge for debt settlement. The laws provided some exceptions for attorneys. Under these exceptions, debt settlement companies may not be subject to the TSR if an attorney represents the client. CAUTION: If a debt settlement company says that they are an “attorney-model”, be sure to determine the attorney’s involvement
Time for Completion
a. Bankruptcy. A Chapter 7 bankruptcy is fast. A full discharge can usually be completed within three to four months. This, of course, ranges depending on the jurisdiction and the court’s workload, but it is still much faster than with debt settlement or with Chapter 13. A Chapter 13 bankruptcy is, by definition, a plan that lasts 3 to 5 years.
b. Debt Settlement. Debt Settlement programs should fully analyze your financial situation to determine the length of the program. Most are for a period of 24 to 36 or 40 months.
Impact on Credit Score
a. Bankruptcy. A bankruptcy can stay on your record for 10 years.
b. Debt Settlement. Any default is adverse and will be reflected as such on your credit reports. Most types of adverse credit history will remain on your credit report for seven years and will be removed automatically after 7 years from the date of last activity. CAUTION: The date of last activity is key. If any payment made towards the debt is considered “activity”, it will re-start the period that it will remain on your credit reports.
Frequency of Participation in Programs
a. Bankruptcy. The frequency with which you can file bankruptcy depends on whether you filed a bankruptcy in the past and the type of bankruptcy. Generally, Chapter 7 bankruptcies cannot be filed more frequently than once every eight years. The term is shortened if the previous filing was a Chapter 13 bankruptcy because the Chapter 13 is for a period of 3 to 5 years anyway. If you file a Chapter 7 bankruptcy after filing a Chapter 13, the period is 6 years. If the new filing is a Chapter 13, the period is 2 years.
b. Debt Settlement. There is no limitation on the frequency of debt settlement. Debts may be added or excluded from the program at-will, depending on changing circumstances of the consumer.
Legal Relief Available
In my opinion, this last category is the most important of all. Both bankruptcy and debt settlement carry legal risk and one must consider the legal implications of their decision.
a. Bankruptcy. Bankruptcy is governed by federal law. Petitions are filed in the United States Bankruptcy Court. It is a good option when legal proceedings (e.g. lawsuits, foreclosures, repossessions) are ongoing because once a petition is filed an “automatic stay” begins.
b. Debt Settlement. Debt Settlement is an excellent option, but only if debt settlement is not the only service provided. A complete solution must include attorney representation. The only way creditors can legally recover a defaulted debt is to file a lawsuit against the consumer. Chances are very good you will be sued in debt settlement so you need a lawyer on our side as well. CAUTION: Avoid any company that says you will never be sued or they can stop anyone from filing a lawsuit – this is false!
Additional resources provided by the author
© Donald A. Green. Donald A. Green is a trial lawyer licensed in California, Oregon, and Washington. His practice includes debt settlement and bankruptcy. He is President of DAG Financial Solutions, Inc. and Principal of Law Offices of Donald A. Green. He may be followed on twitter: @DAGonDebt or @don4law, or on Facebook: DAG Financial Solutions, Inc., Law Offices of Donald A. Green, PC, or DAGonDebt.com. The phone number for DAGonDebt.com is (855) 432-4332 (855-4-DAG-DEBT) or for the Law Offices of Donald A. Green is (800) 994-2889 (800-99-4-ATTY).