Debt Settlement vs. Bankruptcy in California
|Written by San Francisco Bankruptcy Attorney Mark Chernev|
Debt settlement companies attempt to significantly reduce borrowers' debts by negotiating directly with creditors to create a repayment plan on behalf of a debtor. As part of the plan, a borrower agrees to pay creditors a new rate of interest over an extended period of time. The debt settlement plan restructures rather than eliminates the debt.
When someone signs up for a debt settlement plan, the company will typically first advise the individual to make monthly payments to a savings account. This account is used for debt repayment. The amount available for repayment is often reduced by the debt settlement company's fees which must be paid up front can vary greatly. After a certain amount of money has been accumulated, the company then will approach the borrower's creditors to negotiate the use of the money to pay off a percentage of the debt.
Debt settlement companies may also advise a debtor to stop paying bills. If a plan is successful this poses no problem, but an unsuccessful plan can lead to late fees, higher interest rates and even potential lawsuits. If someone is unable to continue the payments they are still liable for the debts. As a result, it is not uncommon for a person's credit to be worse than when the process began resulting in less money available to pay even higher debt.
Most unsecured debts are eliminated in Chapter 7 Bankruptcy. In Chapter 13 Bankruptcy a person is required to use income to pay off some or all of the debt, usually over a 3 - 5 year period. However, unlike a debt settlement plan, legal responsibility on debts is eliminated.
Bankruptcy laws were created to give people a fresh start, enabling them to start with a clean financial slate without the legal obligation to pay their preexisting debts.
Once a person files for bankruptcy, as opposed to signing up for a debt settlement plan, an automatic stay goes into effect. Creditors are prohibited from garnishing wages, cutting off utilities or foreclosing on homes. Harassing phone calls from creditors must stop as well. Although bankruptcy will not eliminate all debts, such as child support, most tax debt and student loans, virtually all other unsecured debt will become part of the bankruptcy discharge.