Chapter 13 versus Debt Settlement

There are several types of bankruptcy, but only two that consumers generally need to be concerned with.

CHAPTER 7 BANKRUPTCY. If you qualify for a Chapter 7, you can “discharge” (effectively eliminate) most of your debts without having to repay anything. Not everyone qualifies for a Chapter 7. Under the new bankruptcy law, all debtors must take a “means test.”

CHAPTER 13 BANKRUPTCY is a solution wherein you make monthly payments to a court appointed trustee for a period of 3 to 5 years (3 years if your income is below the state median, 5 years if it is above the state median.) The amount you pay is as much as you can afford to pay – meaning that your reasonable living expenses are subtracted from your income, and everything left over goes to the trustee.

A Chapter 13 may be your best option if:

a. You owe large tax debts that cannot be eliminated by a Chapter 7 and you want to stop the interest and penalties by forcing the IRS to take a payment plan.
b. You own real estate that is being foreclosed on; or
c. You don’t qualify for a Chapter 7 and you want to stop lawsuits against you.



The chart below gives a comparison between a Chapter 13 Bankruptcy and a Debt Settlement Program.


Chapter 13

Debt Settlement

Amount you pay Your “Best Efforts,” meaning your gross income minus your reasonable expenses. What you feel you can afford. As a rule of thumb, it will be 50% of the balance on your debts divided by 36.
Who decides how much you pay? You make a proposal, which can be commented upon by the Trustee, and is subject to final approval or disapproval by the Court.

You do.

Effect on Potential Lawsuits No lawsuits are allowed while a Chapter 13 is pending, except as allowed by the Bankruptcy Court. Creditors can still file lawsuits against you while you are in a Debt Settlement program.
Costs About $2,500 to $3,500 for attorney fees. 11% of your total payments go to Trustee fees.

Depends on the Debt Settlement Provider

What if your income increases If your income goes up, you must increase your payments. If you get a big tax refund or other unexpected bonus, that must be paid to the Trustee

You are in control of your income.

Effect on Creditor Harassment Creditors must stop all phone calls and collection letters when notified that you have filed a Bankruptcy. Creditors are required by law to stop phone calls when notified that you are represented by an attorney. Sometimes they ignore the law and continue to call anyway.
Information you must provide to Creditors You must provide full and detailed information on every aspect of your financial life when you file a Bankruptcy. You will placed under oath and will be questioned by the Trustee, and by any creditor who wants to question you. Your attorney will provide any creditor with only the information he deems necessary in order to settle your debt.
For how long do you pay? 3 years if your income is below the state median. 5 years if it is above. Decided upon by you and your Attorney. The average plan is for 3 to 4 years.
How Much Are Creditors Paid? Depends on your monthly payment. Can be anywhere from 1% to 100% The target, and the average is about 50% of the principal.
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Mark A. Goodman, Esq.