Is bankruptcy cheaper than a debt settlement? 27 Answers as of June 23, 2013

What is the difference between debt settlement and bankruptcy? I have several maxed credit cards that I can't pay and need to get rid of this debt. Is bankruptcy cheaper than a debt settlement?

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Bird & VanDyke, Inc.
Bird & VanDyke, Inc. | David VanDyke
Yes it can be far cheaper and it will resolve your debt issues. Debt settlement is not a right and does not always work.
Answer Applies to: California
Replied: 9/24/2011
Bankruptcy Law Center
Bankruptcy Law Center | Bill Zurinskas
Bankruptcy is always cheaper than debt settlement. For example, let's say you have $30,000 in unsecured debt on average bankruptcy and that you are paying the average fee for a chapter 7 bankruptcy of $1500. If you settle the debt at 50%, which is the average rate for debt settlement, you will pay $15,000 to settle your debts plus you may pay income taxes on an additional $15,000 of income. If you are at the 20% rate for income taxes, that will cost you an additional $3000 in income taxes. In the past 15 years a new industry called debt settlement firms has evolved. I haven't found one that works well, they all are borderline fraudulent. Most bankruptcy attorneys also do debt settlement and the first thing I tell my clients is that it usually doesn't work. Unless you have access to a source of cash quickly, you have no chance. In the 1980's I had great success in settling debts at 25%. Unfortunately, the debt settlement companies have ruined the debt settlement business since they really don't care about getting their clients the lowest deal. All they are about is getting paid about $500/month so they can collect their 18% fee. They keep almost all of the first 6 payments for their fees, then they start putting the future payments in a trust fund to settle debts. Thereafter they might settle one of the small debts. Meanwhile you are getting seriously in default on your debts. At around 6-12 months in default, the remaining creditors start suing you, you have no option now but to file bankruptcy.
Answer Applies to: Colorado
Replied: 9/22/2011
The Law Office of Marvin Wolf
The Law Office of Marvin Wolf | Marvin Wolf
There are several differences between debt settlement and bankruptcy. The main difference is that debt discharged in bankruptcy is not generally taxable, while debt forgiven in debt settlement is considered income and if over $600 is forgiven, the creditor issues a 1099 form to you and the IRS, which is considered additional income and subject to taxation. This difference in liability must be factored in when determining which avenue is "cheaper", not just fees. Fees for either approach vary from attorney to attorney and service to service.
Answer Applies to: New Jersey
Replied: 9/22/2011
Bankruptcy Law office of Bill Rubendall
Bankruptcy Law office of Bill Rubendall | William M. Rubendall
Debt settlement is usually more expensive that bankruptcy. You might need to pay a lump sum to creditors. In chapter 7 you don't pay creditors anything. In chapter 13 you make monthly payments. Typically, the monthly payment for chapter 13 is less than a debt settlement.
Answer Applies to: California
Replied: 9/21/2011
Janet A. Lawson Bankruptcy Attorney
Janet A. Lawson Bankruptcy Attorney | Janet Lawson
More often than not it is. And bankruptcy has teeth. No one can sue after you file. That is not true in debt settlement.
Answer Applies to: California
Replied: 9/21/2011
    Mercado & Hartung, PLLC
    Mercado & Hartung, PLLC | Christopher J. Mercado
    Filing a BK gets rid of your unsecured debt but has it's repercussions. DS is a form of paying off your debt either in lump sums or payment plans.
    Answer Applies to: Washington
    Replied: 9/21/2011
    Law Office of John C. Farrell, Jr.
    Law Office of John C. Farrell, Jr. | John C. Farrell, Jr.
    The choice between bankruptcy and debt settlement is a personal choice. There are risks and negative effects for each one. Debt Settlement is similar to filing of Chapter 13 with respect to paying back your creditors an amount less than what is owed. I have heard some people refer to it as "informal bankruptcy". I would suggest speaking to a bankruptcy attorney and a law firm which deals with debt settlement to way your options.
    Answer Applies to: Massachusetts
    Replied: 9/21/2011
    The Law Office of Darren Aronow, PC
    The Law Office of Darren Aronow, PC | Darren Aronow
    It is generally less expensive to file a chapter 7 bankruptcy then to settle debt. But often the biggest factor is that in debt settlement you will receive a 1099 for the settled debt as if it was income which may bring high tax consequences in the following tax year. In bankruptcy, the debt is simply wiped out. For example, if you have $20,000 in credit card debt that you settle for $10,000, you will receive a 1099 for $10,000. So besides the cost of settling the debt, you may have tax consequences as well.
    Answer Applies to: New York
    Replied: 9/21/2011
    Ashman Law Office
    Ashman Law Office | Glen Edward Ashman
    A large percentage of "debt settlement" companies are scams. Don't fall for them. See a qualified bankruptcy lawyer to look at your real options.
    Answer Applies to: Georgia
    Replied: 9/20/2011
    Grace Law Offices of John F Geraghty Jr.
    Grace Law Offices of John F Geraghty Jr. | John F. Geraghty, Jr.
    Yes it is much cheaper.
    Answer Applies to: Georgia
    Replied: 6/23/2013
    Heupel Law
    Heupel Law | Kevin Heupel
    Bankruptcy is cheaper and there are no tax consequences. When you settle debt, you have to pay taxes on the amount of debt forgiven, but not when you file bankruptcy. Also, it takes 7 years for your credit to recover after debt settlement; whereas, you recover within two years after filing bankruptcy.
    Answer Applies to: Colorado
    Replied: 9/20/2011
    Tucker Legal Clinic
    Tucker Legal Clinic | Samuel Tucker
    Yes you will spend less filing a bankruptcy than in a debt settlement program, and your chance of a positive outcome is astronomically better.
    Answer Applies to: Mississippi
    Replied: 9/20/2011
    D T Pham Associates, PLLC
    D T Pham Associates, PLLC | Duncan T Pham
    Debt settlement requires paying off the discounted debts. Bankruptcy may allow you to wipe out some debts depending on your filing.
    Answer Applies to: Texas
    Replied: 9/20/2011
    Dan Wilson Bankruptcy
    Dan Wilson Bankruptcy | Dan Wilson
    You can settle credit card debt for 50% or less if you have the cash. Otherwise a Ch 7 is a good route.
    Answer Applies to: Colorado
    Replied: 9/20/2011
    North Sound Law, PS
    North Sound Law, PS | Spencer Bergstedt
    Bankruptcy is often cheaper - and better for you - than debt settlement. While it may be possible to negotiate with your creditor(s) for a lower balance/forgiveness of debt; a reduced interest rate; a reduced monthly payment; and/or some or all of the above, it is a time consuming, often frustrating process and you will need cash to make it work. Settlements of debts will range between 25% to 70% on the dollar. If you are able to negotiate a settlement you will need to forward the lump sum directly to the creditor or creditor's representative. Do not expect any payment plans in the debt settlement process. The other thing to remember about debt settlement is that it can come with tax consequences. The creditor can issue a 1099 to you for the amount of debt that they write-off. As such, you'll have to include that amount in your taxable income. Bankruptcy allows you to walk away without the debt, without tax consequences, and puts you in a better position to rebuild your credit score - all for a lot less money, time & aggravation.
    Answer Applies to: Washington
    Replied: 9/20/2011
    Guardian Law Group PLLC
    Guardian Law Group PLLC | C. David Hester
    Typically yes a bankruptcy will be cheaper, if just your outlay of cash is the deciding factor. You also need to make sure you qualify, determine if you have non-exempt property that you will lose, determine if you credit is important, and ultimatelyif debt settlement or bankruptcy are good options. Each situation is different and you need to look at all aspects not just the cheapest route.
    Answer Applies to: Utah
    Replied: 9/20/2011
    Colorado Legal Solutions
    Colorado Legal Solutions | Stephen Harkess
    In many cases, debt settlement will fail to keep you from getting sued by your larger creditors before you have saved up enough money to settle the debts. In such a case, you get to pay for debt settlement and then pay for bankruptcy as well. Filing for bankruptcy protection is generally a better option.
    Answer Applies to: Colorado
    Replied: 9/20/2011
    Law Offices of Michael J. Berger
    Law Offices of Michael J. Berger | Michael J. Berger
    In general, bankruptcy usually costs much less than debt settlement. A typical Chapter 7 bankruptcy costs $2,000.00, is over in 4 months, and does not involve making any payments to creditors. A typical debt settlement costs more for the services of the debt settler, and requires the debtor to pay an average of 50% of the debt to the creditor over a number of years.
    Answer Applies to: California
    Replied: 9/20/2011
    Diefer Law Group, P.C.
    Diefer Law Group, P.C. | Abel Fernandez
    Bankruptcy can be cheaper than debt settlement. It depends what chapter you file.
    Answer Applies to: California
    Replied: 9/20/2011
    Law Office Of Magnolia Zarraga
    Law Office Of Magnolia Zarraga | Magnolia Zarraga
    Many times a bankruptcy is cheaper than debt settlement. Many people don't understand that by the time you are considering debt settlement programs your credit has already taken a hit. Filing for bankruptcy is the quickest way to work on re-establishing your credit because the bankruptcy will typically only last 4 months. If you do debt settlement programs you can be paying your creditors for years and in the end they will still report that you settled for less than the full amount owed. This negative information will stay on your credit report for 7 years but you won't be able to work on re-establishing your credit until your repayment is complete. Credit card companies are not obligated to work with debt settlement programs, so many will still call to collect while you are in debt settlement. They will also continue with other remedies such as lawsuits. Bankruptcy stops the creditors cold. They won't be able to call you, send you bills or sue you, and in most cases all the debt will be eliminated. Many people end up filing for bankruptcy after being in debt settlement programs for a year or more. Don't throw your money away. Consult with a reputable bankruptcy attorney who can analyze your situation and tell you all your options.
    Answer Applies to: California
    Replied: 9/20/2011
    Law Office of Michael Johnson
    Law Office of Michael Johnson | Michael Johnson
    I would say yes, but it matters on a lot of factors, like your income, assets and debt. You should consult with an attorney to discuss your options.
    Answer Applies to: Florida
    Replied: 9/20/2011
    Judith A. Runyon, Esq. Attorney at Law
    Judith A. Runyon, Esq. Attorney at Law | Judith A. Runyon
    I don't know anything about debt settlement. Bankruptcy discharges unsecured debt.
    Answer Applies to: California
    Replied: 9/20/2011
    The Northwest Debt Relief Law Firm
    The Northwest Debt Relief Law Firm | Thomas A McAvity
    Almost always and in contrast to debt settlement it actually works.
    Answer Applies to: Oregon
    Replied: 9/20/2011
    Law Office of Eric Ridley
    Law Office of Eric Ridley | Eric Ridley
    In most cases, yes. A bankruptcy, however, will stay on your credit for ten years as opposed to credit card default or lawsuits which will remain for seven. I am currently in litigation against a debt negotiation company because the fees they charged to my client were outrageous compared to what it would have cost my client to go through a chapter 7 proceeding.
    Answer Applies to: California
    Replied: 9/20/2011
    The Schreiber Law Firm
    The Schreiber Law Firm | Jeffrey D. Schreiber
    Both have a negative impact on your credit and bankruptcy is a greater negative impact. However debt settlement usually requires that you have about 40% to 50% of the total amount available to immediately pay the creditor in order for them to settle. Some will take as many as three equal payments rather than a lump sum. Depending on your income, you can file either a Chapter 7 or a Chapter 13 bankruptcy. In a Chapter 7, do get rid of all of your debt and usually pay nothing. In a Chapter 13, you pay back some or all of what you owe, depending on your income and therefore your ability to repay the debt. In a debt settlement, the amount of debt forgiven is subject to possible taxation as income on your tax return where you would have to pay income taxes on the amount forgiven. In bankruptcy, it is not considered income and there is no income tax impact.
    Answer Applies to: California
    Replied: 9/20/2011
    Theodore N. Stapleton, PC
    Theodore N. Stapleton, PC | Theodore N. Stapleton
    Yes depending upon the amount of debt. Often you pay credit counselors for settling debts and don't get anywhere except for paying the credit counselor.
    Answer Applies to: Georgia
    Replied: 9/20/2011
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