Comparison Chart
Wondering what options besides bankruptcy are available for resolving your debts? Use this handy chart to compare alternatives.
| METHOD OF DEBT RESOLUTION | TYPICAL APPLICATION | LENGTH OF PROCESS | COST | ADVANTAGES | DISADVANTAGES | EFFECT ON CREDIT |
|---|---|---|---|---|---|---|
| CHAPTER 7 | • Below-median debtors with at least $8,000 to 10,000 in dischargeable debt (typically credit cards, medical bills, utilities) •Above-median debtors who can beat the means test |
• Two to three weeks pre-petition preparation; longer, if debtor needs time to pay a fee
• Can be done more quickly in cases of emergency • Once filed, court process takes about 90 days |
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• My firm can usually match any other attorney’s fee |
• Quick fresh start • Stop garnishment and levy and avoid 1099 (tax document) for canceled debt |
Loss of nonexempt assets (which only happens in about 5% of cases and can be minimized or avoided with good legal advice) | • Reset at about a 600 score within a year • Get a mortgage in two to three years |
| CHAPTER 13 | • Stop sheriff’s sale and cure arrears • Above-median debtors who cannot beat the means test • Pay off priority debts • Wipe out marital obligation (other than support) • Debtors with nonexempt assets that they want to keep • Debtors who’ve filed Chapter 7 within last four to eight years |
Three to five years | • Starts at $2,900 plus fees • Minimum of $500 down |
Fees don’t need to be paid in full prior to filing | It takes three to five years to start rebuilding credit | • Similar to Chapter 7, with the caveat that it is difficult, though not illegal or impossible, to procure credit while in Chapter 13 • You really don’t start rebuilding until you’re done |
| DEBT SETTLEMENT (BANKRUPTCY ALTERNATIVE) | • Debtors with one or two major debts, perhaps disputed • Debtors with reasons not to file Chapter 7, such as nonexempt assets or too much income |
Two to three months: You’ll typically start with the biggest ones first; the general rule is that old debts settle for 50 cents on the dollar | $500 to $1,000 for one creditor, less for additional creditors | Can sometimes avoid bankruptcy | • To settle, you still have to pay the creditors • Can exceed the cost of bankruptcy • It’s not always successful • You can get 1099’d for forgiven debt |
Will still affect credit about the same as bankruptcy |
| LETTERS TO CREDITORS (BANKRUPTCY ALTERNATIVE) | Debtors on Social Security | It takes about six to 12 months for calls and bills to stop | $750 for the first 90 days, then, at client’s option, $375 per 90 days thereafter | • Less expensive than bankruptcy • Sometimes referred to a “poor person’s bankruptcy” • No paperwork to fill out • No court to appear at |
• Not as effective as bankruptcy • Creditors can sue, try to levy bank accounts • Creditors can send 1099s • Judgment creditors can get an order to disclose assets and a warrant if the debtor fails to abide |
• Seven to 10 years • The idea is that the debtor will not likely have much need for good credit |
| FOR-PROFIT DEBT RESOLUTION SERVICES |
• People who have been convinced that bankruptcy is a bad thing • See also Debt Settlement, above |
• Can take five years • Typically implode after about two years |
• Can cost thousands • Fees paid first • Additional fees upon settlement |
Good question | • Creditors can still sue you and get a judgment enabling garnishment of wages and/or bank levy • You can get 1099’d • Operators of these services are often not licensed in the state of Minnesota |
Even if successful, you won’t start to rebuild until you are all done |
| NONPROFIT CREDIT COUNSELING (FAMILY MEANS, LUTHERAN SOCIAL SERVICES) | People with high income (or nonexempt assets) who can’t file Chapter 7 and would likely have to pay all their debts in full in Chapter 13 | Five years | Nominal; just pay the debts back | • They will handle calls from your creditors • They can be successful in getting creditors to waive or substantially reduce interest • They will also honestly tell you if you really belong in bankruptcy, unlike a for-profit debt resolution service |
• It takes five years to rebuild • You still pay the debts back Some creditors may drop out |
• Your credit will be bad for several years since the creditors are reducing interest • You won’t really start rebuilding until you are done |
| DEBT CONSOLIDATION | People with good credit and nominal debt or high income | As long as it can be done, e.g., a second mortgage can be a 30-year note | Basically nothing – you are paying the debt, hopefully with less interest | • Can preserve credit • Can lower interest |
• It takes a bite out of cash flow, especially if done by way of a 401(k) loan. • Additional payments can be a stressor on the budget • If the consolidation loan was taken out with help from relatives, that can cause preference if a bankruptcy becomes necessary |
Possibly not applicable |
| DO NOTHING | • Debtors on Social Security • Procrastinators • Self-employed debtors with few assets who can live on cash and are hard to collect against |
Endless, until you do something about it | Nothing, until you do something about it or start getting garnished and levied and charged bank fees | It’s easy, you don’t need to do anything. It’s possible that creditors will give up and let the statute of limitations pass (typically six years) without using, then the debt goes away) |
Eventually creditors will get judgments, garnish wages and levy bank accounts | You will wallow in bad credit until you act to move forward |