Woman looking at debt papers while working on a calculator


Winter Law Group Jan. 29, 2021

The average household credit card debt in California stands at $10,496, the fourth highest in the nation, while the average mortgage debt in the Golden State has reached a whopping $363,537. Both sets of statistics were gathered prior to the COVID-19 outbreak in March 2020.

Since that time, household and business incomes have both suffered severe fluctuations, while home prices throughout the state have continued their seemingly unending rise.

In other words, we have a recipe for debt disaster here in California. Whether that plays out or not, certainly many individuals are now facing debt obligations exacerbated by pandemic economic conditions that could force them to make some serious decisions.

If your debt load becomes unmanageable for whatever reason, and you find yourself falling behind by missing payments or paying less than the minimum owed, you could benefit from either debt settlement or bankruptcy. Which one is better for you?

If you’re in the Fresno, California, area, or nearby in Visalia, Merced, Clovis, or Madera, contact our debt relief team at the Winter Law Group. We will explore all your options with you and help you come to the decision that is right for you.

Debt Settlement vs. Bankruptcy

In many ways, a Chapter 13 bankruptcy filing is similar to a debt settlement agreement. You get to consolidate all your debts, usually at reduced levels, into one monthly payment that lasts for three to five years. The downside is that your credit report takes a hit for seven years, and you cannot obtain new credit during the payoff period without the bankruptcy court’s permission. Additionally, your bankruptcy is not discharged until you’ve paid everything off.

A Chapter 7 filing, which liquidates all your nonexempt assets and at least partially pays off your creditors, is an even bigger hit on your credit. Though you are discharged from your debts as soon as the process concludes — usually in a few months — the filing stays on your credit report for 10 years.

Pros and Cons of Debt Settlement

One huge difference between bankruptcy and debt settlement is that the latter takes place outside of a courtroom, and your debtors are under no legal obligation to participate. While some creditors will agree to take a lesser payoff amount rather than nothing, others may continue their debt collection efforts or even file a lawsuit against you.

If you can get a debt settlement company to lower your obligations and come up with a repayment plan that you can afford, this should enable you to avoid bankruptcy and stop the collection calls, texts, and emails as your creditors start getting repaid, either wholly or partially.

As mentioned, debt settlement companies operate outside of the bankruptcy system, so they must work with your creditors on a voluntary basis to reduce the amount owed. Depending on your arrangement with the company, you can then either accept individual settlements from different creditors, or you can consolidate the whole debt load into one new loan with a fixed monthly payment.

As mentioned, your creditors are under no obligation to cooperate, and they can continue to hound you, go to court for relief, and even garnish your wages at work — despite your favorable settlement with other creditors.

Another downside is that the IRS will often consider your forgiven debt, which is called settled debt, as income and charge you taxes on it. This will not happen with a bankruptcy filing.

The debt settlement companies also expect to be paid for their efforts. They often charge fees of 15-25% of your total debt load or more. The good news is that the fee usually doesn’t kick in until they’ve reached a settlement. The bad news is, if they reach a settlement for, say, 30% of your debt, they will then immediately hit you with 30% of the agreed-upon fee.

Sadly, when all is said and done and you have a reasonable debt settlement plan, if you miss a payment or two, the debt collection process may start all over again, and you could end up owing more than you started with.

How The Winter Law Group Can Help

All of this may make it sound like bankruptcy may be the safer option, but that’s not always the case. A good debt consolidation and settlement agency — or even a nonprofit credit counseling agency — can sometimes be the difference between you and bankruptcy proceedings. 

Whenever you consider a debt settlement agency — nonprofit or for-profit — make sure to check on their record with the state attorney general or a local consumer protection agency, even the BBB (Better Business Bureau). Our debt relief team can help you with this process.

At the Winter Law Group, we have been assisting clients in and around Fresno for more than a decade as they seek to resolve their debt problems either through bankruptcy, debt settlements, or other means. We can assess your situation and recommend a financial relief strategy going forward that suits your personal situation. Contact us in confidence should your debt load become unmanageable or even overwhelming.