What are the Differences Between Debt Settlement and Bankruptcy?

When you are struggling with debt, you might be considering personal bankruptcy as an option, but you also may be thinking about debt settlement. Debt settlement is often depicted as an alternative to bankruptcy that can allow struggling consumers to deal with debt without having to go through the bankruptcy process. Yet debt settlement is not always so straightforward, and bankruptcy is not nearly as devastating to your financial record or credit as you might think. Our Oak Park bankruptcy attorneys can provide you with more information about debt settlement and bankruptcy, and we can help you to find the best solution to your debt problems.

Debt Reduction Versus Debt Elimination

A debt settlement is a particular kind of agreement that a consumer enters into with one or more creditors in order to reduce the amount of debt the consumer owes, and to repay a smaller portion of the money borrowed. Differently, in both Chapter 7 and Chapter 13 bankruptcy, remaining eligible debt at the end of the bankruptcy case can be discharged.

While Chapter 7 and Chapter 13 bankruptcy processes are quite different from one another, both can result in a discharge of debt. In a Chapter 7 bankruptcy case, all eligible debt is discharged within a few months, typically, of filing for bankruptcy. In a Chapter 13 bankruptcy case, the debtor enters into a repayment plan that usually lasts from three to five years, and at the end of that period, any remaining and eligible debt can be discharged.

Taxability of Forgiven Debt

Is the debt that is forgiven taxable in a debt settlement or a consumer bankruptcy? This is another critical way in which debt settlement and bankruptcy differ from one another.

When a consumer enters into a debt settlement agreement with a creditor, any amount of debt that is forgiven will be considered as taxable income, and the debtor will need to pay taxes on that amount of forgiven debt. Differently, in a personal bankruptcy case, debt that is discharged is not considered to be taxable income. Accordingly, a debtor who goes through a bankruptcy case will not be required to pay income taxes on any amount of debt that is discharged through the bankruptcy process.

Effects on Your Credit

The effects of a debt settlement versus a personal bankruptcy on your credit are slightly different, but not as much as you might think. According to The Balance, a debt settlement is “slightly less damaging to your credit than bankruptcy.” However, both a debt settlement and a bankruptcy filing will impact your credit, and your credit score can recover from bankruptcy faster than you might think.

Especially if you are trying to decide between a debt settlement or a Chapter 7 bankruptcy filing, you should consider the benefits of consumer bankruptcy in the long run. One of our Oak Park bankruptcy lawyers can provide you with more information.

Contact an Oak Park Bankruptcy Lawyer for Assistance

If you have questions about debt settlement versus consumer bankruptcy, an experienced Oak Park bankruptcy attorney at our firm can speak with you today. Contact the Emerson Law Firm to learn more about how we can assist you.


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