Feeling trapped by debt? Understanding your options can help you take back control.

If you’re buried under a mountain of debt and struggling to keep up with payments, you might be looking for a way out. Two of the most common solutions are bankruptcy and debt settlement, but these options work very differently. Each has advantages and drawbacks, and the right choice depends on your financial situation. Consulting with a Monroe Louisiana bankruptcy attorney can provide clarity on which option is best suited for your circumstances. Let’s go over what each option means, how they work, and which one might be the best fit for you.

Quick Summary:

  • Bankruptcy provides legal protection and can eliminate most debts quickly, but it stays on your credit report for years and may require giving up certain assets.
  • Chapter 7 wipes out unsecured debts fast, but not everyone qualifies; Chapter 13 sets up a repayment plan, helping you keep your home and car while paying over time.
  • Debt settlement allows you to negotiate a lower payoff, avoiding court, but it takes time, can damage your credit, and creditors are not required to settle.
  • Choosing the right option depends on your finances. If you’re unsure, consulting a Monroe Louisiana bankruptcy attorney can help you make the best decision.

 

What Is Bankruptcy?

Bankruptcy is a legal process that allows individuals or businesses to eliminate or restructure their debts when they can no longer afford to pay them. It provides relief for those who are financially overwhelmed and need a fresh start. Bankruptcy is handled in federal court, and once you file, creditors must stop trying to collect money from you. This includes phone calls, lawsuits, wage garnishments, and other collection efforts.

There are different types of bankruptcy, but for individuals, the most common ones are Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, often called liquidation bankruptcy, is the fastest and most direct way to erase most unsecured debts, like credit card bills, medical expenses, and personal loans. However, it comes with the possibility of losing some of your assets. In a Chapter 7 case, a court-appointed trustee may sell (or “liquidate”) certain valuable property to repay creditors. That said, many essential assets, like your primary home, a modest car, and basic household belongings, may be protected by exemption laws, meaning you won’t lose everything.

A key benefit of Chapter 7 is that it typically takes only three to six months to complete, after which most of your debts are officially discharged. However, not everyone qualifies. You must pass a means test, which compares your income to the state median. If your earnings are too high, you may have to file for Chapter 13 instead.

Chapter 13 Bankruptcy

Unlike Chapter 7, Chapter 13 bankruptcy doesn’t wipe out debts right away. Instead, it reorganizes them into a structured repayment plan, allowing you to pay off what you owe over a period of three to five years. This option is often best for people who have a steady income but are overwhelmed by their financial obligations.

One key benefit of Chapter 13 is that you can keep important assets like your home or car, as long as you stick to the plan. It can also help you catch up on missed mortgage payments and prevent foreclosure. However, missing payments could lead to the court dismissing your case, putting you back at square one.

Regardless of which type you file, bankruptcy does not eliminate all debts. Student loans, child support, alimony, and some tax obligations generally cannot be erased through bankruptcy. It will also stay on your credit report for up to 10 years for Chapter 7 and seven years for Chapter 13, making it harder to get loans, mortgages, or even some jobs.

What Is Debt Settlement?

Now, you may ask, what’s the difference between bankruptcy and debt settlement? 

Debt settlement is an alternative to bankruptcy that involves negotiating with creditors to pay less than what you owe. Instead of filing a legal case, you (or a debt settlement company) offer creditors a lump sum that is lower than your total balance, but enough for them to accept as payment.

Creditors may agree to settle because they’d rather recover a portion of the debt rather than risk getting nothing if the borrower declares bankruptcy. However, this process requires you to stop making payments on your debts for months—or even years—before negotiations take place. This is risky because late payments can hurt your credit score and result in collection calls or lawsuits.

Many people hire debt settlement companies to negotiate for them. These companies promise to get lower settlements, but they often charge high fees, and not all creditors are willing to negotiate. If a creditor refuses, you could end up owing the full debt, plus late fees and interest. Be cautious, as some companies are scams that take fees without actually settling your debt.

If a settlement is successful, the forgiven portion of the debt might be considered taxable income, meaning you could owe the IRS money at tax time. This is an important factor to consider before choosing this route.

Which Option Is Best for You?

Deciding between bankruptcy and debt settlement depends on your financial situation, goals, and the type of debts you have. Here’s how to determine which might work best for you:

  • Bankruptcy is a better option if you have little to no income, overwhelming debt, and no way to pay it off. It provides legal protection and can eliminate most debts quickly, but it has long-term credit consequences.
  • Debt settlement is a better option if you can afford to save up for settlements, have mostly unsecured debt (like credit cards), and want to avoid the legal process of bankruptcy. However, it can take a long time, damage your credit, and might not work for all debts.

If you’re facing foreclosure or wage garnishment, bankruptcy might provide faster relief by stopping those actions. But if you’re simply trying to lower your debt amount while avoiding court, debt settlement may be worth considering.

Struggling with Debt? A Monroe Louisiana Bankruptcy Attorney Can Help!

No matter which option you choose, it’s important to get the right advice. Bankruptcy is a serious legal process, and debt settlement carries financial risks, so consulting with a Monroe Louisiana Bankruptcy Attorney can help you make the best decision for your situation.

The goal is to get out of debt and regain control over your finances—whether that means wiping out debts through bankruptcy or negotiating a lower balance through settlement. E. Orum Young Law also handles bankruptcy cases, providing guidance on Chapter 7 and Chapter 13 filings to help you achieve financial relief. Contact us today for a free case review.