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Is debt settlement better than filing for Chapter 7 bankruptcy?

Sometimes, if a person in Texas is facing overwhelming debt, they may be tempted by a debt settlement offer that claims it will protect the debtor from bankruptcy. However, sometimes these offers are too good to be true. Are there circumstances in which filing for bankruptcy is preferable to a debt settlement offer?

First of all, it used to be the case that a debt settlement company would resell a person's debts even though they claimed the debts were settled. While this is less likely these days, particularly in cases in which the debtor is working to settle the debt with the lender itself instead of a company that purchases debts from lenders, it can still happen. Also, debtors still need to make payments to the debt settlement company, and the amount that is forgiven must be reported as income to the debtor.

Therefore, it may be better for those who owe more in debt than what they can afford to pursue bankruptcy. A Chapter 7 bankruptcy filing can allow a debtor to be absolved of many of their debts, such as credit card debt, medical debt and other unsecured debts. In fact, the entire Chapter 7 bankruptcy process can be completed in a few months. Moreover, once Chapter 7 is filed, the debtor can no longer be sued by his or her lenders. However, a debtor's credit will take a hit if the debtor files for bankruptcy.

In the end, those who are facing insurmountable debt may be well-served to discuss their situation with an attorney. An attorney may be able to explain what options the debtor has regarding the debt, so the debtor can make an informed choice on what steps to take next.

Source: Los Angeles Times, "Debt settlement vs. filing for bankruptcy: Pros and cons," Liz Weston, Oct. 1, 2017

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