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Should I Go Bankrupt or Do Debt Settlement? – Endeudado

“Dear Steve,

I am 29 years old and 2 children and my wife. I am into too much debt that I am considering filing for chapter 7 bankruptcy. I owe 30,000 dollars in credit card debt. I have a mortgage of 98,000, a car loan, and a student loan. I am not behind on payments for anything, but I am really having trouble making ends meet. I have talked to a bankruptcy lawyer and from what he told me it appears my best option is chapter 7. He told me that after bankruptcy I would only keep my house payment, student loan payment, and car payment.

What is your advise, do you think chapter 7 is my best option? How about debt settlement?


Dear Endeudado,

Excellent and timely question, thank you.

Your situation highlights the distinct difference between the bankruptcy approach or debt settlement. Debt settlement companies sell debt settlement services as if they automagically result in large amounts of debt forgiven with no pain or penalty. That’s not true.

Either solution is going to result in some impact to your credit but once all the debt is resolved the credit can be easily rebuilt.

Lets look at the differences of the two approaches.


  • Chapter 7 bankruptcy will discharge your unsecured debt within a few months.
  • After debt is discharged you can begin to rebuild debt quickly and have funds available to begin to save again quickly. This will allow you to build a emergency fund to protect you and your family.
  • There will be no collection activity once your creditors are notified of your bankruptcy.
  • There will be no lawsuits as a result of debt included in bankruptcy.
  • There will be no tax consequences for debt forgiven in bankruptcy.
  • Payments to creditors will stop immediately, even before you file bankruptcy.

Debt Settlement:

  • In order to pay the settlement company fees and latter to save for settlements you will have to stop paying creditors and start sending your payments to the settlement company.
  • The fees charged by debt settlement companies are significantly higher than the cost of bankruptcy.
  • You will also have to pay additional fees to the company that will manage your debt settlement escrow account.
  • Once you stop paying your creditors you will wind up in collections. Debt collectors will hound you and if you hide from them they may call you at work or call your neighbors to find you.
  • Failure to pay creditors can result in lawsuits and wage garnishments.
  • Forgiven debt may be taxable by the IRS.
  • This approach may take 3-5 years and then you can begin to start rebuilding your credit.
  • The success rate for debt settlement is very low, less than 10% of people settle all their debts with debt settlement.
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And then there is credit counseling or debt management. if you are just getting by on your current minimum payments and not behind a credit counseling program is not going to lower your monthly payment much, if at all. And what you are really looking for is some breathing room so that doesn’t sound like a good approach.

Since you are not currently behind on your debt, an unsecured fixed rate debt consolidation loan from might make good sense for you if you qualify for a lower interest rate and the payment is lower as well. Using the debt consolidation loan you could payoff up to $25,000 of credit card debt and improve your credit since the cards would not be closed or reported as delinquent.

So I’ll leave it up to you, which route looks better to you?


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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.


  • You know, that although you can’t discharge a student loan on a BK you may be able to pay it off w/ another loan. This other loan may be discharged. However you’re not really supposed to do that since it’s cheating the system. Although I don’t know how anyone, or if anyone, could check up on that. Just a thought.

    A debt management plan (credit counseling) is best if preserving your credit is important for you. Debt settlement just doesn’t make sense unless you’re accounts are already in collections. Just make sure you find a way to change your spending & savings habits so you don’t end up with high credit debt again.

  • Steve,

    Would you be able to tell me more-less how much a payment would be on a 25,000 dollar loan from

    Depending on how much the payment would be I might consider this route instead of bankruptcy.


    • There is no way to predict what the payment will be since it depends on the interest rate you are approved for. You’d have to contact them and see if you would qualify.


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