We all know that many Americans are currently experiencing financial difficulties. Excessive debt can negatively impact a person's sense of happiness and well-being. As consumers consider their options, a barrage of advertisements confront them. Perhaps the most prominent of these advertisers is the Debt Settlement / Negotiation Industry. Others tout bankruptcy as the solution. The following article will briefly compare and contrast the two approaches, including typical scenarios and outcomes.

The personal Bankruptcy option:
Most consumers have at least some knowledge about Bankruptcy. While there are several Chapters available (chapters 7 and 13 are most common for consumer debtors) and the law is complicated, for our purposes we will address bankruptcy very generally. Think of Bankruptcy as the Federal government's version of obtaining a fresh financial start. In some cases (as in a chapter 7) most debts can be discharged completely; meaning that the bankruptcy debtor will never have to pay the obligations. Of course, many factors exist as every debtor's situation is fact-specific. Please note that chapter 7 will not eliminate liens. Also, your non-exempt assets may be liquidated to pay your creditors. However, in most cases, consumers are surprised how generous the statutory exemptions can be. In most instances, consumers keep all or most of their assets while completely discharging most or all of their debt.

For some, a repayment plan may be the most appropriate, or even required. Many people will end up in a repayment plan because they cannot or do not want to qualify for a chapter 7. The most common reason is either that the debtor makes too much money to qualify for a chapter 7 (ie. they fail the dreaded means test) or they don't want to risk losing any of their significant, non-exempt assets. In short, a Chapter 13 is a repayment plan (typically for a 3 or 5 year period). It involves determining how much disposable income the debtor has and can contribute toward re-paying his/her creditors. Payments are made to the US Trustee. Typically, at the end of the repayment plan, outstanding unsecured debts will be discharged.

The assistance of a licensed attorney is highly advised in either scenario.

The cost of bankruptcy:
Although not required, it is highly advisable that an attorney be retained to help you with your Bankruptcy. The law is quite a bit more complicated then most consumers assume. The filing fee for a typical consumer Bankruptcy is usually no more than $299.00 (a bit less for a chapter 13). In addition, typically two credit counseling classes are required: one prior to filing the petition and one post-filing. Each class can usually be accomplished via the internet for $50 or less. Attorneys' fees can vary considerably, especially based on geographics and the complications of your specific matter. A typical chapter 7 may cost between $1500 to $3000. A chapter 13 will likely cost in the 3-4 thousand dollar range. Plus, there are Trustee fees involved in a chapter 13, which vary by your plan payment amounts.

The Debt Settlement / Negotiation Option:
There are many types of companies offering debt settlement and negotiation. For our purposes, we are addressing those that are NOT licensed attorneys. A typical scenario would be: A consumer is having a hard time paying down their debt. They contact one of these companies whose advertisement claims that they can settle debt for 40 to 50 cents on the dollar. A payment plan is made whereby a monthly payment is deposited with the Settlement Company. As the balance on account rises, the company will attempt to negotiate the debts for a lump sum payoff. The creditors are in NO WAY obligated to accept the offer or deal with the Debt Settlement Company. THIS TYPE OF PLANS EFFECTIVENESS IS REALLY GEARED TOWARD UNSECURED DEBTS LIKE CREDIT CARD DEBTS & HAS LITTLE EFFECT ON SECURED DEBT. Another important issue is that this industry is largely unregulated. Research any settlement company you are considering using. Many are ran by unlicensed and unqualified individuals who are essentially self-proclaimed "experts".

The Cost of Debt Settlement / Negotiation:
Typically, Debt Settlement Companies charge a percentage fee based upon the amount of debt that the consumer brings into the program. Around 15% seems to be the norm. So, for example, a consumer bringing $100k in credit card debt into a settlement program can expect to pay a fee to the Company of around $15k. Most companies will collect these fees FIRST...In other words, the proceeds from the payments the consumers make will first be credited toward paying the debt-settlement company. In an ideal scenario, the consumer will still end up paying the 40-50 cents on the dollar IF EVERYBODY HAPPENS TO AGREE TO SETTLE AT THIS PRICE. SOME COMPANIES MAY REFUSE TO SETTLE AT ALL AND CHOOSE TO SEEK THEIR OTHER LEGAL REMEDIES (wage garnishments, etc.) So, in our "ideal" scenario ($100k in credit card debt), the consumer would pay about $15k in Fees and then $40-50K to settle the debt = approx $65,000, typically over the course of several years.

The Effect on Collection Efforts - Bankruptcy:
Creditors will respond differently depending on whether a consumer seeks bankruptcy relief or debt settlement.

Bankruptcy: Upon the filing of your BK petition, an automatic injunction goes into effect prohibiting (with some exception) creditors from contacting the debtor or continuing any efforts to collect on the debt. This injunction (known as the "Automatic Stay") stops phone calls, lawsuits, threats and other forms of collection. It stays in effect throughout the bankruptcy proceeding and can only be avoided in narrow circumstances when the creditor gets special permission from the court. Relief from the automatic stay is usually granted for secured creditors looking to engage in repossession or foreclosure of their collateral. But, many of these creditors simply wait, pending the outcome of the bankruptcy. note: In a chapter 13, creditors will be bound by the terms, once the repayment plan is confirmed by the court.

The Effect on Collection Efforts - Debt Settlement / Negotiation:
Unlike in Bankruptcy, the law affords no protection here. Creditors are not even obligated to deal with Settlement Companies, much less participate in their settlement plans. Typically, collection efforts will remain or increase in nature, late fees will be tacked-on, and in many cases, THE CONSUMER MAY BE SUED. If this occurs, the fact that you have hired a Debt Settlement Company will be no defense and of little help. This together with the high-cost of Debt Settlement is one of the common reasons why many Settlement clients drop out early and turn to other more effective means of handling their debt, such as bankruptcy. Unfortunately, at this point, the consumer would have likely squandered a large sum of money into the failed "settlement" attempt. This total lack of protection illustrates how valuable the Bankruptcy Automatic Stay can be. It legally stops creditors in their tracks and protects the consumer.

Impact on Credit Ratings:
Either option is going to have a negative impact on your credit. The issue is how negative and for how long. These are tough questions to answer with specificity, but the following should be considered: In Bankruptcy, the consumer's credit takes an initial hit and then can begin to rebuild. Once the debts are discharged they are no longer valid obligations. Also, creditors considering extending credit post-BK will know that it will be several years before this consumer could file for bankruptcy relief again...believe it or not, this offers a certain amount of reassurance to some creditors. With the amount of people filing as of late, this author's opinion is that the stigma attached to filing bankruptcy has lessened, and will continue to do so as time goes on. With Debt Settlement, a consumer's credit is likely to be damaged throughout the process. Plus, the creditor may never come to an agreement at all. Lawsuits and other harsh action may continue to damage your credit indefinitely.

Conclusion:
For those who qualify, Bankruptcy Relief seems to be a more logical option. BK offers a high level of effectiveness coupled with a great value. It works whether or not the Creditor likes it, and the cost is likely to be very low compared to the debt to be discharged. It highly advisable that one retain the services of an experienced Bankruptcy Attorney; giving you the assurance that a responsible, educated and licensed individual will be handling your matter. Thus, you would have recourse if something were to go wrong.

With Debt Settlement, a lot of risk and expense is involved. There are no guarantees that a settlement will EVER be reached and if it is, the cost will likely be very high. In addition, there are the high % fees charged by these for-profit companies. Little if any protection exists for the consumer who may be subject to a myriad of collection efforts, including lawsuits. This explains why so many clients fail to complete the programs after wasting large sums of money.

Consider your options carefully and make a well informed decision with the aide of experienced counsel.

Timothy Combs, Esq. is the lead attorney at the Law Office of Timothy Combs, a full-service California Law Firm serving consumers in bankruptcy and family law matters. See http://combslawcenter.com for more information or to learn more about the author.