Our Bankruptcy Attorney Blog

Contrary to some of the information floating around on the Internet, there is no comparison whatsoever between bankruptcy and debt settlement since the two are generally mutually exclusionary. Frankly, if the debtor has the money to make a successful debt settlement arrangement with all of his creditors, then he has too much money to file for Chapter 7 bankruptcy. Conversely, if the debtor qualifies for Chapter 7 bankruptcy, then it is unlikely that he has the money to enter into any sort of debt settlement agreement that a lender would accept. Though there may possibly be a few unusual exceptions, if you have the money for debt settlement agreements, then you have too much for a Chapter 7 bankruptcy and vice versa; so the two options are not viable alternatives to each other.

Debt settlement agreements generally involve paying off a large portion of a given debt in either a lump sum or over an expedited period of time in exchange for having the balance of the debt forgiven. Needless to say, most creditors are not very enthusiastic about forgiving legitimate debts; therefore in order to get the creditor to agree, the debtor’s offer has to be attractive. The creditor is under no obligation whatsoever to agree to any sort of debt settlement option, but may opt to do so if they believe that the alternative will be a complete default on the debt – either simple default or through bankruptcy. Nevertheless, the terms still have to be better than what the creditor could expect to get through law suits or other collection practices. The result is simple enough: in order to get a debt settlement option, the debtor has to have either a good sum of money immediately on hand (for a lump sum payment) or a good amount of discretionary income that will be devoted to increased payments to the creditor. Obviously debt settlement is not applicable to any sort of secured loan like a mortgage or car payments where foreclosure or repossession is an option.

In that debt settlement only applies to unsecured consumer debt, this also raises the issue of the means test implemented by the Bankruptcy Abuse Prevention and Consumer Protection Act of (BAPCPA) 2005 to Chapter 7 bankruptcy. Essentially any debtor with large unsecured consumer debts and above average income – which would be necessary for debt settlement – is not allowed to file for Chapter 7 bankruptcy. The BAPCPA mandated means test has made debt settlement and Chapter 7 bankruptcy incompatible: if you have the means for one, you cannot do the other and vice versa. 

There is still the option of Chapter 13 bankruptcy, which largely boils down to a strict debt restructuring program, but no debt is discharged and the debtor will still be expected to pay off the entire amount due over the life of the Chapter 13 plan (usually three to five years). However, Chapter 13 bankruptcy is predicated on having a decent level of steady income and if this was possible then debt settlement should also have been possible on better – and less intrusive – terms. People that qualify for Chapter 13 bankruptcy (debt restructuring without property liquidation of debt discharges) should be in good enough shape to negotiate decent debt settlement agreements.

Tags: bankrupcty

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