You’re starting to see the debt settlement commercials everywhere again. Did you know that the main funders of those companies are the creditors themselves? The truth is that credit card companies do not want you to file bankruptcy because the bankruptcy laws are fair but offer them no leverage. The bankruptcy code decides what they get, if anything, and givers you power over what they get. In a debt settlement, they get to decide if they will participate and they get to decide how much they want to settle the debt. Take it or leave it. In Chapter 13 bankrutpcy, the bankruptcy code determines how much they get and you have the power to make them accept it whether they like it or not.
While both choices require a monthly payment to creditors, the difference between the two is huge.
Debt settlement companies charge a rather large fee for their “services.” What they don’t tell you is that their fee is collected first – before any payments are made to creditors and before they even attempt to settle the debt. What they show you in their proposal is simply what they are going to offer the creditor. The creditor doesn’t have to accept it. Not all creditors participate in these settlement plans. The settlement companies know who they are but they don’t tell you upfront. So, they tell you to stop paying your creditors so you can pay them $400-$1,000 per month to settle your debt. They will hold that money until you have enough to settle a debt in a lump sum. What they forget to mention is that meanwhile, your credit score is plummeting because they are reporting your non-payment every month to the credit bureaus. Eventually, you will get sued by one of them while you are paying the settlement company and then you will come to see a bankruptcy attorney. I’ve seen this scenario way too often. All too often, debt settlement companies are nothing more than a scam but you won’t figure that out until you’ve paid them thousands of dollars.
Chapter 13 also requires a monthly payment. However, you will only pay what you can afford to pay based on the criteria found in the bankruptcy code. You usually end up paying far less in a Chapter 13 payment plan than the Debt Settlement plan. A Chapter 13 payment plans only last from 3 to 5 years.
Another fun fact that the debt settlement company forgets to mention is that any settled debt will result in 1098 being issued for whatever balance was not paid. Yes, you will get a tax bill on the balance. In Chapter 13, there is no tax consequence – there are no 1098’s issued.
The final consideration is how quickly your credit score recovers. On the day you file a Chapter 13, your credit score drops but it also starts to rise almost immediately. One of the factors in credit scoring is the debt to income ratio. Your debts go to “zero” right after filing and that causes a nice jump in most credit scores. In a debt settlement, your credit score continues suffering while you are trying to settle and it still gets reported as delinquent.
In summary, Chapter 13 is the same thing as a debt settlement except the creditors don’t get to negotiate and your credit score improves quicker. Talk to an experienced bankruptcy attorney to find out how it can work for you.