Bankruptcy or debt resolution? 7 questions to help you decide

Debt resolution and bankruptcy are powerful tools you can use to deal with heavy debt. But they are very different, and you might wonder if bankruptcy or debt resolution is better for your situation. 

Not to worry: Answering these seven questions should point you in the right direction.

1. Am I okay with going public about my debt?

Bankruptcy happens in the court system, and that makes it public. Credit bureaus have access to bankruptcy and will note it on your credit report. Anyone (for instance, an employer doing a background check) can find it. That said, family, co-workers, or frenemies are unlikely to come across your misfortune in a newspaper or searching online. Only a few small jurisdictions publish bankruptcy filings in print or online. 

It’s illegal for your employer to punish you for filing bankruptcy. And if you switch jobs, most future employers won’t care if there’s a bankruptcy in your past, depending on your profession. But like it or not, bankruptcy carries a stigma in many places. You might feel a little icky about it yourself. 

If you feel queasy about people in your business or social circle finding out about bankruptcy, you’ll be relieved to know that debt resolution is strictly between you, your creditors, and your debt professional. 

2. Do I want to include all of my creditors?

Bankruptcy requires that you include all of your creditors—even family members. Even companies you’ve been with for years. Even accounts in good standing. They all get swept into the bankruptcy net, because the law says it’s unfair to pay some creditors and not others.

There is no such requirement with debt resolution. You can enroll only the accounts you wish to resolve. 

It’s important to note that creditors may also find it unfair to pay some but not others. Leaving some credit cards out of your debt resolution program could hinder the negotiation process, especially if you’re actively using credit cards while claiming that you have a hardship.

3. Do I qualify for Chapter 7?

Chapter 7 and Chapter 13 bankruptcies work very differently. Chapter 7 takes only a few weeks or months and has a successful completion rate of over 95%. You would have to surrender non-exempt assets to the court, and those are sold to pay creditors. Assets are things you own that have value. Every state has a list of things you can keep, and those are called bankruptcy exemptions. If you have very few assets or mostly exempt assets, you could get out from under your unsecured debt for very little money. 

However, many people earn too much to qualify for Chapter 7. Others avoid it because they have assets they don’t want to lose. Chapter 13 requires filers to pay into a plan for three to five years. The court distributes money to the creditors, and at the end of the plan, remaining debts are forgiven. Chapter 13 is more complicated, takes longer, and has a much lower success rate than Chapter 7. 

4. Am I okay with a judge running the show?

Bankruptcy is a two-sided coin. On one hand, your creditors can’t opt out. They have to come to the table, and they’re required to forgive as much of your balances as the bankruptcy judge decides. The judge’s job is to look out for the rights of both you and your creditors. 

Just remember that in bankruptcy you are also bound by a judge’s decision, even if you don’t like it. With debt resolution, debt professionals negotiate with creditors on your behalf. They work to reach an arrangement covering how much you’ll pay and how much will be forgiven. You don’t have to participate unless you like the deal and agree to pay that amount.

5. Can I afford upfront filing fees and attorney charges?

Bankruptcy courts require you to pay filing fees in advance. And if you hire an attorney (most people do because the success rate is much higher than going it alone), you have to pay in full for a Chapter 7 bankruptcy before your lawyer files your case. That typically costs about $2,000. Chapter 13 filers can often include attorney fees in their monthly plan payment. However, there are setup fees as well. 

You don’t pay a fee at all for DIY debt resolution. For professional debt resolution, you don’t pay unless and until the company reaches an agreement with your creditor, you approve it, and the first payment has been made.  By law, debt resolution firms can’t charge you up front. 

6. Am I about to lose my home?

Only bankruptcy can stop or delay a home foreclosure, at least temporarily. If you have a pile of credit card debt and are also in trouble with your mortgage, bankruptcy could probably help you with both. 

Debt resolution might make it easier to afford your mortgage, but if you’re in imminent danger of losing your home, it won’t stop a foreclosure. 

7. Am I insolvent?

Debts forgiven in bankruptcy are not taxed. Debts forgiven through debt resolution are normally taxed unless you’re insolvent. That means what you owe is greater than the value of what you own. So it’s good to know if you are insolvent before deciding on bankruptcy or debt resolution. 

The IRS has a really simple insolvency worksheet and instructions to determine if you’re insolvent or not.

You can (sort of) have it both ways

Debt resolution could help you get rid of debt without filing bankruptcy. If you’re still trying to decide if bankruptcy or debt resolution is your best option, no worries. You could start with debt resolution, and if your creditors won’t negotiate or you don’t like what they offer, you could look into whether bankruptcy is an option for you. Not everyone qualifies for bankruptcy, and for those who do, there are upfront fees. Debt resolution doesn’t require you to pay filing fees or attorney charges.  

It’s technically possible to back out of a bankruptcy proceeding and switch to debt resolution. However, you need the court’s permission to dismiss your filing, and there’s no guarantee you’ll get it. You also won’t get your filing fees and attorney costs back. If you’re on the fence, looking into debt resolution might be a good place to start.