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Debt Settlement Vs Bankruptcy

Debt settlement is a service offered by a debt relief company that involves negotiating with your creditors to accept a lump sum payment that is lower than your total accumulated debt.  See this link to find out more about debt settlement (link to other blog post about ‘what is debt settlement’ here).

Bankruptcy is legal action taken to wipe away your debts partially or entirely. There are two main types of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcies usually deal with unsecured debt such as credit card debt. Generally, Chapter 7 bankruptcy is filed by individuals or entities whose expenses exceed their income and therefore have no way to pay back their debts. Chapter 13 bankruptcies are usually filed by people who have some disposable income but have fallen behind in paying their secured debts (mortgages, car loans) or debts exempt from Chapter 7 bankruptcies (child support, student loans). Chapter 13 bankruptcies allow an individual to make payments on a reduced amount of their debt with no more interest accruing over the course of 3 to 5 years.

For purposes of this discussion, the comparison will be made primarily between Debt Settlement and Chapter 7 bankruptcy.

Legal Considerations

First of all, it is important to look at how these two different operations could affect you in a legal sense. Bankruptcy grants you an automatic stay upon filing which means debt collectors can no longer garnish your wages, sue you, or call you to harass you about your debts. This legal protection is not available to individuals using debt settlement. Despite how this sounds, using quick debt settlement (6-24 months) has a very low risk for these sort of issues.

With bankruptcy you lose control over your assets. All assets of the debtor that are not exempt are placed into a bankruptcy estate which can be liquidated by the bankruptcy trustee at any time.  This is not the case with Debt Settlement.  Your assets remain in your control and are not affected by the activities taken during the debt settlement process.

Impact On Your Credit

Before you begin making any decisions you should be aware of the consequences on your credit report. If you look simply at the numbers, then Chapter 7 (and the lesser used Chapter 11) bankruptcies stay on your credit report for 10 years, a bit longer than debt settlements which tie with Chapter 13 bankruptcies for 7 years.

However, usually 2 years after the completion of either a bankruptcy or a debt settlement program you can, for the most part, get unsecured credit (credit cards) without too much trouble. In fact, some experts will argue that in terms of credit, the only benefit of debt settlement over bankruptcy is to avoid the stigma associated with bankruptcy.  That stigma, though, could have a greater impact on the decision as to whether a creditor will consider you for a loan.

Debt Relief Companies vs. Bankruptcy Attorneys

Debt relief companies will have multiple options to offer you such as debt counseling, debt settlement and debt consolidation.  They also have a good understanding of bankruptcy and whether that may be a good option for your debt situation.  Debt relief companies are not law firms so they will not provide legal counseling and if bankruptcy seems to be a good fit they will encourage you to see a bankruptcy attorney.

Bankruptcy lawyers focus primarily on bankruptcy and rarely offer other services so they may not have a good understanding as to whether there are better alternatives for you than bankruptcy.

Time To Complete The Process

The average debt relief company will complete your debt settlement program in 6 – 48 months.  PCS Debt Relief typically completes programs within 6-24 months.

In comparison, Chapter 7 bankruptcies take about 3 months after Chapter 7 filing is completed while Chapter 13 bankruptcies take 36 – 60 months after filing.


Debt Relief companies vary in the fees they charge but generally their fees are based on either a % of the debt balance before negotiation or a % of the amount saved after debt negotiation.  Percentages can range from 10-20%.

Attorneys will charge you the standard fees to submit the records to file for bankruptcy plus their attorney fees to assist you in submitting the records.  The total cost will vary by attorney.  There are some pro-bono attorneys that can assist you in filing for bankruptcy if you can’t afford the attorney fees.

Consult a Debt Relief Company

To determine if debt settlement or bankruptcy is the right solution for you, contact a debt relief company like PCS Debt Relief. A debt relief specialist can review your situation and provide you with the best debt relief options.

PCS Debt Relief is not a law firm, and does not provide legal counseling. If PCS believes bankruptcy may be the best solution for you after analyzing your situation, your debt analyst will refer you to an attorney to receive legal counseling.

PCS Debt Relief
July 15th, 2016|

About the Author:

At PCS, our programs are tailored to the client’s specific financial needs. What sets us apart from our competitors is that clients see relief, before any payment is received. Our NO UP-FRONT FEE policy ensures our client’s a 100% satisfaction guarantee. We also do not charge any monthly fees or any cancellation fees. We want the client to feel comfortable during the whole process that’s why we allow them to be part of it every step of the way.

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