What’s the Difference Between Debt Relief vs. Bankruptcy?

Jill Bridges
Expert Contributor
Last Updated:
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If you’re struggling with overwhelming debt, you have options. Debt relief and bankruptcy are solutions to serious debt problems that can relieve some of the tension on your finances and help you get a fresh start, but you should consider other areas.

Find out more about debt relief vs. bankruptcy and weigh the advantages and drawbacks of each to decide which type is right for you.

What Is Debt Relief?

Also known as debt settlement, debt relief involves working with a company that will coordinate with your lender to lower the amount that you owe. This alternative is usually only an option for people with unsecured debt, or debts with no collateral backing. Examples of unsecured debt include credit cards and personal loans.

When you enroll in a debt relief program, a trust account will be established and you’ll make payments into this account every month. This money is used to pay for the settlement and fees to your debt relief company.

What’s the Difference Between Debt Relief vs. Bankruptcy?

Debt settlement does not come with any guarantees that this approach will work for you; lenders may reject the settlement. If you stop making debt payments with the expectation of negotiating, you could end up owing more money.

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What Is Bankruptcy?

For individuals dealing with debt, Chapter 13 and Chapter 7 are the two most common types of bankruptcy.

With Chapter 7, you aim to discharge your debt. This court order prevents creditors from collecting outstanding debts. You’ll get a fresh start to your finances, but a Chapter 7 bankruptcy may put your assets at risk.

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With Chapter 13, you eliminate only a portion of your debt. The rest is paid off through a payment plan that lasts three to five years. Your assets aren’t at risk with a Chapter 13 bankruptcy.

Debt Relief vs. Bankruptcy

Consider Your Costs

Debt settlement companies usually have a 20% fee applied to your debt. By law, this fee can only be charged if the debt has been settled successfully. Income taxes may apply to your settled debt, and late fees and interest will continue to accumulate as long as the debt exists. Ultimately, you may save only 10% of your total debt.

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With bankruptcy, a filing fee may apply. The Chapter 7 filing fee is $335, and the Chapter 13 filing fee is $310. Certain taxpayers may be eligible for a waiver. Your income must be 150% below the poverty line to qualify for this waiver.

The cost of bankruptcy typically comes from the cost of the lawyer. Choosing to use a lawyer increases the chance of a successful bankruptcy, however. Legal fees for Chapter 7 are between $500 and $3,500, while legal fees for Chapter 13 are between $1,500 and $6,000.

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Which Type of Bankruptcy Is Worse for Your Credit?

In many cases, bankruptcy will damage your credit more than debt relief will. A Chapter 7 bankruptcy stays on your credit report for 10 years, while Chapter 13 stays on your credit report for seven years. Choosing either option can impact your credit score by 150 to 200 points.

Successful debt relief is considered “settled” by your credit report for seven years, but it’s unlikely to restrict your borrowing during this time. It may have the same 150- to 200-point decrease, however.

If debt settlement isn’t successful, however, it can be a detriment to your credit score. For example, if you stopped making payments on your debt with the hope of a successful settlement, you may default on other debts if your debt can’t be settled. This effect can hurt your credit score and leave you with no alternative but bankruptcy.

Eligibility for Debt Relief vs. Bankruptcy

You can qualify for debt relief if you have at least $7,500 in unsecured debt of $7,500. It’s rare for a debt relief company to operate in every state.

To qualify for Chapter 13 bankruptcy, you need less than $1,184,200 in secured debt and unsecured debts less than $394,725, and you must be employed.

To qualify for Chapter 7, you must satisfy a long list of requirements to verify that you are unable to clear your debts.

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Before opting for either bankruptcy option, you also need to complete counseling with a credit counseling agency. You’ll be ineligible if you’ve had a past petition dismissed in the past 180 days.

Success Rate

Of the two, bankruptcy is more likely to be successful. Almost every person who files for Chapter 7 has debt cleared, particularly if that individual uses a lawyer.

With Chapter 13 bankruptcy, more than half of all cases succeed due in large part to clients who cannot stick to payment plans for the debts that aren’t discharged. As a result, many Chapter 13 cases are converted to Chapter 7.

In the past, debt relief had a rate of success of roughly 10%. Since the government has been addressing fraud from debt companies, the success rate is approximately the same percentage.

Which Option Is Better?

With debt relief vs. bankruptcy, it’s important to remember that both options are extreme solutions for clearing debt. Choosing between them means weighing the pros and cons of each one, as well as considering the costs and risks involved.

  • Debt relief has more risk, since it has a success rate of 10%. The expense can be higher than you anticipate.
  • Chapter 7 bankruptcy has a quicker process and more success than debt relief, but it has strict qualifications and could result in a loss of valuable assets.
  • Chapter 13 bankruptcy requires a significant length of time to complete, but it does not have the same risks as debt relief. Regardless of what happens, you’re free to keep your car, home, and any other collateral that you may have.

Both debt relief and bankruptcy can have an impact on your credit score, which may affect your ability to buy a home or find employment in the future. Before deciding to pursue either option, check to see if other options exist for paying off your debt.

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If you’re considering debt relief, Solvable can assist you with options. We’ll put you in contact with top-rated debt settlement companies and help you explore your options so that you can get on the road to a debt-free life.


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Jill Bridges
Expert Contributor
Last Updated: