Debt Resolution vs. Bankruptcy

The following is presented for informational purposes only and is not intended as legal advice.

If you’re not able to keep up with your debts and most repayment options seem out of reach, you may be thinking about bankruptcy or debt settlement. Basically, you’re not going to be able to repay your debts in full and you know it. There may be a third option.

Debt resolution plans (DRP) are similar to for-profit debt settlement, and like both debt settlement and bankruptcy, can wipe away unmanageable debts, but a DRP and bankruptcy can be very different experiences. To determine which is best for you, consider the following:

How does a debt resolution plan work?

A debt resolution plan, also known as a debt resolution program, is essentially a non-profit spin on debt settlement:

  1. Begin by working with a debt counselor to create a plan and make sure it’s right for you
  2. Start making monthly payments to the plan administrator
  3. While funds are being collected, your debt counselor will begin negotiating with your creditors for a partial repayment (sometimes as low as 50% of the original balance)
  4. Once these settlement agreements are reached, the plan administrator will begin using the accumulated funds to repay your creditors
  5. After every account is settled, your plan is closed (usually within 12-48 months) and you are debt-free

Who’s it best for?

Debt resolution is best for consumers who are already delinquent on their debt payments, or are about to become delinquent, and can’t repay their debts in full under their current terms.

How does a bankruptcy work?

First, let’s clarify which kind of bankruptcy we’re talking about:

Chapter 7 is what most consumers think of as “bankruptcy.” Your debts are wiped away and your non-exempt assets are sold off to (partially) repay your lenders. You need to pass a means test to qualify, so this may not be an option if you have an adequate income.

Chapter 13 is what’s often called a “wage earner’s plan” because rather than having your debts liquidated, you’re enrolled in a fairly strict 3-5 year repayment plan. So while you get to keep your assets with a Chapter 13, you still get stuck with a multi-year repayment plan.

If you qualify for a Chapter 7 bankruptcy it’s probably because you have a very limited income, in which case you’ll likely struggle with any repayment plan. Therefore, if you’re weighing bankruptcy versus a DRP, you’re really talking about Chapter 13.

  1. Work with a lawyer to file for bankruptcy
  2. Complete pre-filing bankruptcy counseling
  3. Complete full repayment plan
  4. Complete pre-discharge bankruptcy education before any remaining debts are discharged

Who’s it best for?

In addition to being more affordable than continuing to repay debts on your own, Chapter 13 also provides some important legal protections. If you’re facing a potential foreclosure or repossession of a vehicle, Chapter 13 bankruptcy may be a way to prevent those outcomes and give you a chance to catch up.

Comparison of Debt Resolution vs. Bankruptcy

Debt types covered

  • Debt resolution plan: Credit card debt, personal loans, medical debt, collection debt
  • Chapter 13 bankruptcy: Credit card debt, personal loans, medical debt, collection debt

Length of time

  • Debt resolution plan: 24-48 months
  • Chapter 13 bankruptcy: 36-60 months

Interest rate

  • Debt resolution plan: No interest charges
  • Chapter 13 bankruptcy: No interest charges

Fees

  • Debt resolution plan: In most states, MMI’s fee is 15% of the original balance collected incrementally as each account is settled. You may be charged a $15 fee if payments are returned for insufficient funds.
  • Chapter 13 bankruptcy: There’s a filing fee (currently $313), attorney fees (typically $3,000-$5,000), which are partially paid upfront, with the rest included in your monthly payment.

Consequences for missing a payment

  • Debt resolution plan: No consequence for missing a single payment; plan may be cancelled after missing multiple payments.
  • Chapter 13 bankruptcy: Missing even a single payment may result in your plan being dismissed, costing you your bankruptcy protections.

Credit requirements

  • Debt resolution plan: No credit requirement
  • Chapter 13 bankruptcy: No credit requirement

Credit score impact

  • Debt resolution plan: Missing payments and settling for less than what’s owed are bad for your credit, though you may be able to recover quickly once the debt is paid off.
  • Chapter 13 bankruptcy: A Chapter 13 bankruptcy can damage your credit badly and will stay on your credit report for 7 years, making it difficult to regain access to more credit.

Potential savings

  • Debt resolution plan: You may be able to settle for as little as 50% of your original balance, plus fees.
  • Chapter 13 bankruptcy: Priority debts and secured debts are repaid in full, but you may be able to discharge a portion of your non-priority, unsecured debts, such as credit card debts.

Conclusion

If you have limited income and you’re worried about potentially losing your home or other important assets, a Chapter 13 bankruptcy may be your best option. It may ultimately cost more than a debt resolution plan, but it comes with some important legal protections you can’t get from any other debt relief option.

If your priority is getting the most affordable payment and your property isn’t currently at risk, then a debt resolution plan may be better, as it can save you more money and have you out of debt sooner.

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