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Debt Settlement vs. Chapter 13 Bankruptcy Explained

One alternative to bankruptcy is debt settlement. Debt settlement has its pros and cons, and we’ll talk about both in this blog—and why sometimes Chapter 13 bankruptcy might be the better answer.

With debt settlement, you ask your creditors to accept less than what they’re asking for, effectively canceling a portion of the debt. It gives you a chance to pay at least part of your debt. Usually you offer your creditor a lump sum or negotiate new payment terms. You can only settle unsecured debt—debt not backed up by collateral. So you would not be able to use debt settlement to pay off a car or other property.

The risk with debt settlement, though, is that your creditors may still report the account in default to the credit bureaus, even if you pay off some of it. Contrary to popular belief, it will damage your credit score, just like bankruptcy. Also, the IRS considers any cancelled debt over $600 to be taxable income—so you will be required to pay tax on the “forgiven” debts.

On the other hand, if you choose Chapter 13 bankruptcy, you have the safety of bankruptcy court behind you. Once your bankruptcy plan is set in motion, when you finish your payment plan, your debts are discharged and your accounts are no longer in default. Yes, the bankruptcy will remain on your credit report for a number of years, but it would be the same with debt settlement—without the safety of a bankruptcy lawyer and trustee on your side.  Also, a bankruptcy discharge of debt avoids income tax liability that would occur if you “settled” your debt with the creditor.

Call us toll-free today at 1-800-260-1402 for your complimentary initial bankruptcy consultation or visit one of our 100 offices across the United States. You can also read our many informative articles on our website,  For the best advice on filing for Chapter 7 or Chapter 13 bankruptcy protection, trust the experienced and caring attorneys at Jacoby & Meyers Bankruptcy Law.

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