{"id":286931,"date":"2021-02-21T08:17:10","date_gmt":"2021-02-21T13:17:10","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/bankruptcy\/debt-relief\/bankruptcy-vs-debt-relief.html"},"modified":"2024-11-26T14:40:00","modified_gmt":"2024-11-26T19:40:00","slug":"bankruptcy-vs-debt-relief","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/bankruptcy\/debt-relief\/bankruptcy-vs-debt-relief.html","title":{"rendered":"Bankruptcy vs. Debt Relief"},"content":{"rendered":"\n
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Bankruptcy vs. Debt Relief<\/h1>\n\n
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\n By Amy Vandervort-Clark, J.D.<\/a> | Legally reviewed by Susan Mills Richmond, Esq.<\/a>\n | Last updated\n
\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n\n

Bankruptcy and debt relief are two distinct ways to deal with certain kinds of debt. Bankruptcy provides a legal path to discharge certain debts; by contrast, debt relief offers payment plans as a path out of debt. Both debt relief options offer pros and cons to debtors who need relief.<\/p>\n

Learn more about each form of debt relief in this FindLaw article.<\/p>\n

What Is Bankruptcy?<\/b><\/h2>\n

Bankruptcy<\/b><\/a> is one path to debt relief. There are two types of bankruptcy available to individual debtors under the Bankruptcy Code: Chapter 7, and Chapter 13.<\/p>\n

Chapter 7 Bankruptcy<\/h3>\n

Chapter 7 bankruptcy<\/b><\/a> is a liquidation plan. It’s more challenging to qualify for because you must meet a means test that takes into account your income, expenses, and family size. In Chapter 7, a\u00a0trustee helps sell off eligible assets to repay creditors. The Court will discharge the remaining balance, giving the debtor a fresh start.<\/p>\n

Anyone interested in Chapter 7 bankruptcy should note that not all types of debt are dischargeable under this Chapter. Student loan debt, for example, is extremely difficult to discharge in a Chapter 7 bankruptcy.<\/p>\n

Chapter 13 Bankruptcy<\/h3>\n

Chapter 13 bankruptcy<\/b><\/a> is often called the \u201cwage earner” plan. Under the supervision of the Bankruptcy Court and a U.S. Trustee, you and your creditors focus on a reorganization of your debts and establish a repayment plan. A single payment is set for three to five years, at the end of which\u00a0your remaining balance is eligible for discharge.<\/p>\n

Filing For Bankruptcy<\/b><\/h2>\n

You must attend credit counseling before initiating a bankruptcy filing. Finding an accredited credit counseling program should be your first step, even if you don’t file for bankruptcy.<\/p>\n

Bankruptcy\u00a0will not discharge your student loans, child support, alimony obligations, or tax debts.<\/p>\n

Chapter 13 Bankrutpcy Filing<\/h3>\n

Chapter 13 bankruptcy requires a repayment plan<\/b><\/a>, so it may not be the right type of bankruptcy if you don’t have a steady income. It can help people who want to stop creditor harassment and need more time to pay down their debt.\u00a0<\/p>\n

Chapter 7 Bankruptcy Filing<\/h3>\n

Chapter 7 bankruptcy will dismiss unsecured debts. You do not need to pay them back. It also requires creditors to follow bankruptcy laws, helps control asset repossession, and can rebuild creditworthiness as you make new payments on time.<\/p>\n

What Is a Debt Relief Program?<\/b><\/h2>\n

Debt relief<\/b><\/a> includes various programs or plans to get you out of debt without declaring bankruptcy. In these programs, you learn budgeting skills<\/b><\/a> and money management to help you live debt-free<\/b><\/a>. Often, these programs can negotiate a lower interest rate or payment plan with your creditors and lenders.\u00a0<\/p>\n

Comparing Bankruptcy v. Debt Relief Programs<\/h2>\n

Bankruptcy and traditional debt relief programs each have pros and cons. Here is a closer look at the impact of each path to debt relief.<\/p>\n

Creditor Harassment<\/h3>\n

Debt relief programs do not provide a legal end to creditor harassment<\/b><\/a>. Bankruptcy does. Once you file a bankruptcy petition, the filer receives an automatic stay<\/b><\/a> of actions from creditors. This stay stops all legal actions against you, including foreclosure. Under a debt relief program, creditors can still call and ask for their payments.<\/p>\n

Debtor\u2019s Best Interest<\/h3>\n

You should be cautious of a debt relief program offered by a creditor or credit card company. They\u00a0are not working in your best interests, and their goal is to settle their own debt.<\/p>\n

By contrast, in a bankruptcy, your bankruptcy attorney is on your side.\u00a0The trustee is charged with upholding the bankruptcy laws when dealing with the debtor and its creditors. Their goal is to help find a lasting debt resolution.<\/p>\n

Creditors might say only specific debt programs<\/b><\/a> will work for your debt, but this is untrue. You might have many more options available, including bankruptcy.<\/p>\n

Relief for Different Types of Debt<\/h3>\n

Debt relief programs may focus on one creditor or a small part of your debt. This may not be helpful if you have many credit cards or medical debt. By contrast, debtors have the following options under the U.S. Bankruptcy Code<\/b><\/a>:<\/p>\n