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.

Though all bankruptcy cases go to the federal bankruptcy courts, there are actually two tiers of exempt property: one given by the federal government and another given by the state government. The person filing for bankruptcy has to claim his or her exempt property according to either the federal or state standard, however the state standards tend to offer more exempt items than the federal ones (since they are supplemental to the federal exemptions rules); most people end up choosing the state schedule of exempt items. This means they differ, with more conservative states offering little more than the federal exempt properties and more liberal states offering considerably more protection. 

Any item that the debtor wish to protect under exemption has to be listed on the appropriate schedule in the filing paperwork of the petition. Failure to include this schedule, or failure to include some particular item to it, is a common mistake made by people filing their own bankruptcy papers and the result is that the omitted item is not protected from creditors. Although the rules differ per state, in general there are two classes of properties that are frequently exempt from liquidation under Chapter 7 bankruptcy: items needed to live and items needed to make a living.

Items needed to live typically include a portion of the equity in their primary residence, up to a certain amount, which ensures that the debtor’s house cannot be taken from them. Other items in this category include reasonably necessary items such as clothing, household furnishings, household appliances, jewelry (up to a certain value), amounts of cash from public benefits such as welfare, social security, or unemployment; pensions and damages awarded for personal injury.

Items needed to make a living include one (or more) motor vehicles up to a certain value; the tools of the debtor’s trade or profession (usually only up to a certain value), and other items that can be reasonably claimed to be essential for the debtor to earn income. Every state has different requirements in this respect, but the requirements almost always have upper limits on them. That is, typically a debtor cannot claim a car worth $200,000 as their primary means of transportation or a private machine shop as necessary for income if the debtor is in fact a doctor.

Items that are almost always excluded from exemption include: secondary homes or real estate, secondary vehicles (unless more than one person works in the household), recreational vehicles (boats, RVs, motorcycles), valuable collectables, cash and financial instruments not connected to one’s retirement plan, pension, or public assistance, and so on. Being sure to claim everything that can be in any given jurisdiction – and NOT claiming things that should not be – is one of the most important reason to use a bankruptcy attorney when filing.