- Chapter 7 at a glance
Chapter 7
Wipes out most unsecured debt in about 4 months
Chapter 13
One payment over 36 to 60 months, usually pennies on the dollar
Negotiation
Settling individual debts directly with creditors
Settlement Companies
Accounts often fall further behind while you save
Forgiven Debt
Can be taxable income outside bankruptcy
Cost to Start
From $0 down for Chapter 13, W2 employed
The options for unsecured debt
Most people with unmanageable debt have four realistic options: pay it over time on their own, negotiate with creditors, use a debt settlement company, or file bankruptcy. Each has a different cost, timeline and effect on your credit.
Bankruptcy
Chapter 7 discharges most unsecured debt in about four months, with no repayment plan, for people who pass the means test. Chapter 13 combines your debts into one payment over 36 to 60 months. Unsecured creditors are usually paid pennies on the dollar, and whatever remains is discharged.
Both stop collection, lawsuits and garnishments the day we file. Neither needs your creditors to agree.
Debt settlement and negotiation
Settlement means paying a creditor less than the full balance in exchange for closing the account. It can work for one or two debts if you have a lump sum available. Debt settlement companies usually ask you to stop paying creditors and save into an account instead. During that time:
- Late fees and interest keep building
- Creditors can still sue and garnish wages
- Your credit score drops as accounts go into default
- Not every creditor agrees to settle
If a creditor has already sued you or a garnishment has started, settlement will not stop it. Call rather than filling in a form.
Taxes on forgiven debt
Outside bankruptcy, debt a creditor forgives can be reported to the IRS as income, and you may owe tax on it unless an exception such as insolvency applies. Debt discharged in bankruptcy is not taxable income.
Which option fits
It depends on your income, what you own, how much you owe and whether there is something to protect, like a house or a car. On the first call we look at the real numbers and tell you which option makes sense, including when bankruptcy is not the right answer.
| Question | Chapter 7 | Chapter 13 | Settlement |
|---|---|---|---|
| Stops lawsuits and garnishment | Yes | Yes | No |
| Creditors must agree | No | No | Yes |
| Typical length | About 4 months | 36–60 months | Varies |
| Forgiven debt taxable | No | No | It can be |
| Catches up mortgage arrears | No | Yes | No |
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