Debt Negotiation versus Chapter 13

Many consumers are asking whether debt negotiation or bankruptcy is a better option for them.  While each circumstance is different and there is no right answer, this blog will give you some general guidance.

Individuals considering these two options are often primarily concerned with the cost involved with each.  A Chapter 13 case costs in the range of $2500 – $4000, depending on where you live.  While this may seem expensive at first glance, your attorney fees are rolled into the monthly repayment plan and spread out over 3 to 5 years.  In a debt settlement, the cost is generally 10% of the amount of the debt being negotiated, and it often must be paid upfront.  You may also be charged monthly fees.

Another cost that must be considered is the tax consequence.  There are no tax consequences to filing a Chapter 13 case.  In contrast, any debt written-off by a creditor as a result of negotiation or settlement will result in tax liability.  You will receive a 1099c for the amount forgiven if it is more than $600.

The time involved in resolving your financial issues is also an important factor to consider.  A Chapter 13 plan lasts 3 to 5 years.  However, by filing bankrupcty, you immediately get all of your creditors involved.  It typically only takes a few months to get a Chapter 13 plan confirmed, then you go about life as usual, only paying your monthly bills to the trustee.  Debt negotiations can last years because you must deal with one creditor at a time.  Consumers often find it difficult to negotiate with creditors and it can be exhausting.  Creditors can refuse to negotiate with you because all negotiations are voluntary.

Finally, consumers need to consider the effect each option will have on their credit score.  A Chapter 13 will remain on your credit report for 7 years.  Debt that is designated on your report as uncollectable or written-off will also remain on your credit report for 7 years.  Either option is damaging to your credit report.  However, when you emerge from a bankruptcy you have no debt.  This means creditors are typically very open to extending credit to you.

If you are considering debt negotiation or a Chapter 13 bankruptcy, you should consult with a lawyer to discuss which option is best for you.


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