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Chapter 13 Bankruptcy and Settlement Debt Relief - Exploring the Differences
by Chris Blanchet
Whenever we look at debt elimination options, we often consider the best ways to keep our existing assets while simultaneously getting rid of the unsecured debt, typically credit cards with high balances and high interest costs. This all-too-common scenario leaves debtors with two options: Chapter 13 bankruptcy is the most obvious and, perhaps less obvious is settlement debt relief. At first, they seem like very similar options. Let's take a closer look:
Chapter 13 Debt Relief
Folks looking to use Chapter 13 for debt elimination purposes quite rapidly realize that this bankruptcy option gives them the opportunity to hold on to their most-prized assets like the home and personal vehicles while simultaneously washing their hands of credit card debt (and all other unsecured credit debt).
Debt Settlement
Similar to Chapter 13 bankruptcy, settlement debt relief allows the debtor to tidy up their credit card debt, leaving all assets (and not just those used for security on loans) untouched by a third-party trustee. Notice that "tidy up" is not the same as "wipe it clean" as it would be in Chapter 13. Instead of getting a free pass, debtors who use the debt settlement option essentially have their debt reduced to a more-manageable level, providing the much needed relief they need.
The Difference Between Chapter 13 and Settlement Debt Relief
Perhaps the three biggest differences between Chapter 13 and Debt Settlement are the following:
1. Full Debt Relief versus Partial Debt Relief
Chapter 13 eliminates 100% of the unsecured debt, whereas settlement debt relief will only reduce a portion of that same debt load (and even then it applies almost exclusively to credit card debt). That means that debtors under a debt settlement arrangement will have to continue repaying their debt, while folks who file Chapter 13 will not. This becomes more of a cash flow question for the debtor: if the debtor can financially maintain a settlement, then it probably makes more sense; however, if there is very little cash available to repay debt outside of secured debt, then Chapter 13 makes more sense.
2. Public Record versus Private Arrangement
The biggest problem with any type of bankruptcy is that the details of the filing become a public record, available for all to see including family, friends, and neighbors. With settlement debt relief, even though the debtor must make payments on a reduced debt amount, the arrangements remain private between the creditor and debtor, completely confidential. Of course, the price for this benefit is paid since the debtor continues to make debt payments to the creditor. Debtors who are concerned about privacy would never choose the bankruptcy route.
3. Court Involvement versus Informal Private Agreement
Settlement debt relief, as noted above, involves the debtor and creditor and sometimes an intermediary who negotiates on behalf of these parties. These arrangements are "off-the-record" as far as the court system is concerned. In Chapter 13 bankruptcy, the arrangements fall under the scope of the court system. That means that if the debtor inherits a large sum of money or it is later discovered that he can repay the debt that has been discharged under Chapter 13 bankruptcy, the courts can intervene in favor of the creditor. Debtors who prefer informal arrangements will choose settlement debt relief over Chapter 13.
Summary
As shown, these are just some of the key differences between debt settlement and Chapter 13 bankruptcy, even though they appear extremely similar at first glance. It cannot be stressed enough that folks with plenty of debt problems should explore their options in great detail before committing to one or the other.
About the Author
Chris has more than 16 years of experience in the financial services industry, having helped thousands of clients fix their personal finances. He is the author of Help Fix My Finances, the e-book that serves as the premise of the complete Debt Management Program of the same name. Chris also maintains a website dedicated to people with debt problems at HowToRepayDebt.com.
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