Choosing bankruptcy vs. debt resolution
By Gina Freeman
Reviewed by Aaron Crowe
Jul 11, 2023
Read time: 8 min
Bankruptcy and debt resolution are both effective ways to get rid of unaffordable debt.
Bankruptcy is public and takes place in court, while debt resolution is a private process for negotiating with creditors to settle your debt.
Every person’s debt situation is unique. Depending on your circumstances, one of these solutions may be a better choice for you than the other.
Tough times can hit hard, and small changes might not be enough. Severe debt calls for bigger guns. Two of the hardest-hitting solutions are debt resolution and bankruptcy. Once you understand how each one works, you can make an informed decision that's right for you.
Shifting your mindset from your current difficulties to possible solutions is the first step to an improved financial situation. Take a deep breath and get ready to deal with your debt head-on.
Here's what you need to know about debt resolution vs bankruptcy.
What is debt resolution?
Debt resolution is a private process for negotiating with your creditors to accept less than the full amount that you owe and consider it payment in full. Typically, you pay them a lump sum that you both agree to, and they forgive the remaining balance. Some creditors allow a series of payments.
Debt resolution is an option for unsecured debts like credit cards, medical bills, personal loans, and private debts.
How does debt resolution work?
Creditors are less likely to negotiate if they believe that you can repay the entire balance. But if they understand that you can't afford the debt, they may be willing to accept less.
At a minimum, the process looks like this: You contact your creditor, explain your hardship, and make an offer of what you are able to pay. If it's accepted, you pay the agreed-on amount, and they close out (or "settle") your debt.
Negotiating debts isn't quick or easy. You need to have money set aside to offer, which can be challenging when you're trying to make ends meet. Also, you need to be comfortable negotiating with your creditors. The process can be time-consuming and stressful, especially if your account is already in collections and they're aggressively trying to get you to pay.
For these reasons, some people choose to work with a professional debt resolution company. They have negotiation expertise, established relationships with creditors, and a track record of helping people get good results.
When you're in a debt resolution program, the company does the heavy lifting for you. They'll set up an account to help you build a fund for making offers. You make a monthly deposit into this account—it's an affordable amount that's typically lower than the minimum payments you're currently making on your debts. The professionals do all the negotiating with your creditors to settle each of your debts. The whole process takes two to four years on average and could help you get rid of your debt much faster than by making the minimum payments.
Reputable debt resolution companies never charge an upfront fee. As required by law, they can only charge a fee once they have successfully negotiated a debt and you have agreed to the terms. Once those happen, the offer and fee are both paid from your account.
What is bankruptcy?
Bankruptcy is similar to debt resolution in that you may be able to clear debts without paying the entire amount you owe. However, bankruptcy is a public, legal process that takes place in court. There are strict rules for bankruptcy, and it can be complicated.
Any kind of debt can be included in bankruptcy. But if you include a secured debt like a car loan, you have to give up the car (or other property that you borrowed against).
How does bankruptcy work?
Most people file either Chapter 7 or Chapter 13 bankruptcy. Chapter 7 is the "clean slate" bankruptcy designed to give people with lower incomes a fresh financial start. Chapter 13 is the "wage earner's" bankruptcy that lets people pay their debts over three to five years. At the end of this period, any remaining balances are discharged (forgiven).
With a Chapter 7 bankruptcy, you agree to give up all of your property except "exempt" assets, which are things the court allows you to keep. For example—work tools, a modest car, your retirement savings, and some of your home equity. The court sells the rest and gives the money to your creditors. Any remaining balances are wiped out.
With a Chapter 13 bankruptcy, you agree to give up your disposable income for several years. "Disposable income" means what you earn beyond what you need for basic living expenses.
Bankruptcy is complicated. Talk to a bankruptcy attorney for more information about your situation.
Cost of bankruptcy vs debt resolution
For bankruptcy, you have to pay about $50 for credit counseling. The court fees run a little over $300. Lawyer fees for Chapter 7 average $1,500 to $2,500. Chapter 13 attorneys charge an average of $2,500 to $3,000.
Professional debt resolution fees depend on the amount of debt you include in the program and typically range from 15% to 25% of that amount.
Another potential cost of debt resolution (professional or DIY) is income tax. If you're insolvent, meaning your debt balances are more than the total value of your assets, you may not owe taxes on the forgiven debt. Otherwise, you'll be taxed according to your income bracket. Talk to a tax professional about your situation to determine how debt resolution might affect you.
Amounts discharged in bankruptcy aren't taxable.
Which is faster, bankruptcy or debt resolution?
Bankruptcy and debt resolution operate on different timetables.
Chapter 7 is the quickest solution. If you qualify, your debts are usually discharged (forgiven) within six months.
Debt resolution generally takes two to four years, depending on the number of debts and how quickly you can save money for settlement offers. About half of professional debt resolution clients settle their first account within four months of starting a program (here at Achieve, about 60% of our debt resolution members settle their first debt within three months).
Chapter 13 is the slowest, taking three to five years to complete. You'll pay for three years if your income is below your state's median income, and for five years if you earn more. There are no other repayment term options.
If you want to get rid of debt ASAP, bankruptcy is only better if you qualify for Chapter 7. Otherwise, debt resolution may give you a shorter path to the finish line.
Bankruptcy vs debt resolution and your credit profile
You probably plan to rebuild credit after solving your debt problem, and you can. Debt resolution and bankruptcy can both negatively affect your credit, but the negative effect lessens over time.
Generally speaking, the better your credit is when you file for bankruptcy or settle a debt, the farther it'll fall. But if you already have bad credit, negative events tend to have a smaller effect.
Chapter 7 bankruptcy remains on your credit reports for 10 years from the filing date. Chapter 13 bankruptcy goes away after seven years. Delinquent and settled accounts also go away after seven years.
Debt resolution and bankruptcy can both hurt your credit. That's normal and expected. Most of the credit score damage related to debt resolution occurs when you miss payments. Choosing to stop making payments when you begin a debt resolution program allows you to save money for settlements and signals to your creditors that you are unable to pay the full amount. The most important thing to remember is that your credit health can recover over time. Addressing your debt first will put you in the best position to build healthy credit.
Bankruptcy vs debt resolution success rates
Bankruptcy can have a very high or a very low success rate—it depends on which chapter you file. People who are eligible for Chapter 7 aren't required to do much follow-up after they file. (Before they can file, they have to complete credit counseling.) The completion rate for Chapter 7 is about 96%.
However, you might not be eligible to file Chapter 7, or you might have assets you don't want to give up. Sadly, the completion rate for Chapter 13 is just 33%, most likely due to difficulty affording the payments.
Debt resolution isn't a pass-fail situation like bankruptcy. There are many levels of success unique to each person's situation. Debt resolution clients can leave the program at any time, such as when their hardship is addressed, even if they still have debt. The most important measure of success is financial savings, since reducing the amount you owe is a main goal of a debt resolution program. Successful debt resolution program members owe less money when they stop participating than they did when they started.
You can get a sense of program success by looking at how many people come back. If more people re-file for bankruptcy or re-enroll in debt resolution, that's likely an indication that the program isn't very effective. More than one-third of Chapter 13 cases are re-filings. That's a much higher repeat rate than the approximately 5% of debt resolution clients who re-enroll.
Debt resolution vs bankruptcy: other considerations
Here are some downsides to filing for bankruptcy that might matter to you.
Bankruptcy carries a stigma that may be hard for some people to accept.
Some careers, especially those with financial responsibility, can be harder to get into with a recent bankruptcy on your record.
Bankruptcy isn't private—it creates a permanent public record.
Some mortgage programs require a bankruptcy waiting period of two to four years after your debts are discharged. That's five to nine years for Chapter 13 filers.
Bankruptcy takes control out of your hands. Once you file, a judge tells you how much property you'll give up or how much you'll pay into a plan each month. Neither you nor your creditors get much say in the matter.
Debt resolution also has some downsides to consider.
Creditors aren't required to negotiate with you. They may even sue you for the debt if the amount involved is large and they think you can afford to pay. Reputable debt resolution companies may be able to provide or refer you to legal support if a creditor takes legal action so that attorneys can negotiate the debt for you.
Creditors may contact you aggressively once you begin missing payments. Your rights depend on the laws in your state and the types of creditors you have.
The bankruptcy vs debt resolution decision is highly personal. Understand your comfort zone when deciding on your approach.
How to decide between bankruptcy and debt resolution
If you qualify for Chapter 7, it's often the best option. There's no repayment plan.
If Chapter 7 isn't the right path for you, debt resolution may have advantages over Chapter 13. With professional debt resolution, you don't have to pay a fee unless you get results. In Chapter 13, you'll pay court fees and attorney fees whether you have any debt forgiven or not. Chapter 13 has a low success rate and a high rate of re-filing.
Debt resolution is a viable option for people who have the means to pay back some of their debt if they can get part of it forgiven.
Bankruptcy may be on the table after you've exhausted other options and you truly can't pay your debts back at all.
Talk with a professional debt consultant about your situation and what options might work best for you.
Gina Freeman has been covering personal finance topics for over 20 years. She loves helping consumers understand tough topics and make confident decisions. Her professional history includes mortgage lending, credit scoring, taxes, and bankruptcy. Gina has a BS in financial management from the University of Nevada.
Aaron Crowe is an Achieve contributor. He is a freelance journalist who specializes in writing about personal finances. He has worked as a reporter and editor at newspapers and websites for his entire career.
Frequently asked questions
What is the difference between Chapter 7 and Chapter 13 bankruptcy?
Chapter 7 bankruptcy requires you to give up some of your assets in exchange for forgiving your debts. Chapter 13 lets you keep your assets but requires you to give up your disposable income (anything not needed for basic living) for several years. Your income must be under specific thresholds for you to be eligible to file Chapter 7.
Will bankruptcy ruin my credit forever?
Chapter 7 bankruptcy stays on your credit report for 10 years, and Chapter 13 for seven. However, you can begin rebuilding credit immediately after your Chapter 7 discharge or while still in a Chapter 13 plan. So it’s possible to have healthy credit years before your bankruptcy falls off your credit report.
Can I negotiate with creditors on my own?
You can negotiate with creditors on your own. If you’re not successful, you can still hire debt professionals and try again. The pros are experienced negotiators and know what to expect from most major creditors.