Chapter 13 Bankruptcy vs Debt Settlement

In my experience, many people compare Chapter 13 bankruptcy vs debt settlement. Understand the costs and pros and cons of each option to make the most informed decision.

Having worked in the Chapter 13 bankruptcy industry many years, one of the most common questions I get is to explain the difference between Chapter 13 bankruptcy vs debt settlement.

There are many commonalities between the two options:

  1. Chapter 13 bankruptcy and debt settlement are payment plan options
  2. Both options are a consolidation of sorts. In Chapter 13 bankruptcy, you make a payment to the trustee while in debt settlement, you put money into your escrow bank account.
  3. Chapter 13 bankruptcy and debt settlement often become more attractive when you don’t qualify for Chapter 7 bankruptcy.

That said, there are many differences to consider between Chapter 13 bankruptcy and debt settlement.

The purpose of this article is to explain the differences and explain the processes for Chapter 13 bankruptcy vs debt settlement.


Chapter 13 Bankruptcy

A Chapter 13 bankruptcy is a restructuring of your existing debt into a repayment plan, often 3 or 5 years. It is called a wage earner’s plan because it enables individuals to repay all or part of their debts.

Debt Relief

A debt settlement program is also a restructuring of your debt into a repayment plan. It can last up to 5 years or as little as 1 year or less. The debt settlement company tries to negotiate to lower the total amount of your debt. For example, a debt settlement company may try to negotiate a $10,000 debt to $5,000, then take a $1,500 fee. You may save money in this case.

In the past, there were many companies that took advantage of consumers, but with the introduction of the Dodd-Frank Act, many new regulations were put in place to protect consumers from paying fees before having accounts settled. In addition, these debt relief services are on CFPB's radar with an order against such firms as Burlington Financial Group and a lawsuit against one of the biggest players, Freedom Debt Relief.

Is Chapter 13 Bankruptcy or Debt Settlement Cost More Total?

Two of the most common things people care about is the cost to get out of debt. Because Chapter 13 bankruptcy and debt settlement are payment plans, you may want to consider:

  1. Monthly Payment
  2. Length of Program (in Months)

Multiplying monthly payment and length of program (in months) gives you the total cost of that expenditure.

How Chapter 13 Bankruptcy Plan Payment is Calculated

The cost of Chapter 13 bankruptcy is often determined by your disposable income, determined in part by the Chapter 13 bankruptcy forms. If you have a high disposable income, your Chapter 13 plan payment may be so expensive that you actually pay back 100% to your creditors in addition to the Chapter 13 attorney fee and Chapter 13 trustee fee.

If your disposable income is very low, your Chapter 13 plan payment may be very low. 

How Debt Settlement Plan Payment is Calculated

The debt settlement plan payment is often much more simple than the Chapter 13 plan payment.

Most debt settlement companies estimate a 50% reduction of the amount you would owe then they add their fee onto that amount.

So, for example, let’s say you owe $20,000 in debt. The debt settlement company may estimate that they can settle the debt for $10,000, and then charge a 15% fee of $3,000, so the total cost to you is $13,000. Let’s say there’s a 36 month plan. 

Your estimated plan payment would be $361.11 ($13,000/36). Now there is a small escrow bank account fee, but that is the general gist of the debt settlement plan payment pricing.

Comparing your Chapter 13 Bankruptcy and Debt Settlement Payment

You can use this free Ascend's free Chapter 13 calculator. This calculator actually allows you to compare the all in cost between Chapter 13 bankruptcy and debt settlement. It uses the bankruptcy forms to get the number.

Chapter 13 Bankruptcy Process

The Chapter 13 bankruptcy process often starts with hiring a bankruptcy attorney. While some people file a bankruptcy pro se, many people hire a professional bankruptcy attorney to file a  Chapter 13 bankruptcy. Many people qualify for Chapter 13 bankruptcy as long as they are below the debt limit

Once you decide whether to hire a bankruptcy attorney, you have to:

  1. Complete a credit counseling course
  2. Complete bankruptcy forms that specify such information as real estate  you own, bankruptcy exemptions, personal property, credit and debts, co-signers, leases, monthly income, monthly expenses, etc.
  3. Calculate your Chapter 13 repayment plan, using this form.
  4. File your Chapter 13 bankruptcy case
  5. Assignment of trustee for the 341 meeting of creditors
  6. Do Confirmation Hearing.
  7. Complete your debtor education course
  8. Make payments to your Chapter 13 trustee. 
  9. Receive Bankruptcy discharge.

The process does take time, and most people are set for a 3 or 5 year bankruptcy plan, unless you pay back 100% to your unsecured creditors.

Debt Settlement Process 

The debt settlement process is quite a bit simpler than the Chapter 13 bankruptcy process because you don’t have to consider exemptions, real estate, leases, etc. 

Here’s the debt settlement process to get start:

  1. Find a reputable debt settlement company.
  2. Understand what your debt settlement plan payment would be.
  3. Sign a client services agreement and special purpose account agreement (for the escrow bank account)
  4. Debt settlement company will set up an enrolled owned bank account for all your monthly draft payments. 
  5. The escrow account will collect all of the funds for negotiation with your creditors.
  6. The debt settlement company will begin negotiating  when they have the appropriate number of funds or the accounts are enough past due.
  7. You will sign agreements and accept the proposed settlement.
  8. This process is repeated until all your debt has been settled and paid.

You should consider the debt settlement company fees before signing the dotted lines. The amounts can vary greatly, so finding the right company is essentially.

You should also consider reading the FTC’s article on settling credit card debt.

Chapter 13 Bankruptcy Pros and Cons

Here is a list of pros and cons of Chapter 13 bankruptcy. There are certain tips and tricks you can potentially employ to help improve your chance at discharge instead of dismissal.


  1. Consolidation of your debt into one payment to the Chapter 13 trustee
  2. Protection of your belongings
  3. You may only pay a percentage of unsecured debts that  you owe
  4. There is fixed duration of repayment
  5. You could have lower payments than what you are currently paying.
  6. You could lower your car interest rate
  7. Protection against creditor and future lawsuits.


  1. Negative credit report and credit score impact
  2. Plan is 3 or 5 years, which can be longer than debt settlement and Chapter 7 bankruptcy.
  3. Less flexibility if issues occur, leading to potential dismissal.
  4. Your plan payment may increase if your income increases
  5. Chapter 13 bankruptcy can be very expensive

Debt ReliefPros and Cons

Let’s go through the debt relief pros and cons. 


  1. You may be able to save a substantial amount of money and lower your monthly payment via a draft.
  2. You may have more payment flexibility than Chapter 13 bankruptcy.
  3. There’s a possibility that you may get out of debt faster than Chapter 13 bankruptcy.
  4. Avoid bankruptcy and the credit report hit.
  5. You may get access to financing fastest
  6. Accountability from a payment plan.


  1. Negative credit score and credit report implications
  2. Potential taxes on forgiven debt
  3. Late fees and interest accruing before settlement
  4. Creditor lawsuit
  5. Many credit unions will not settle

If you decide to do debt settlement, you should consider understand the risk of the cons happening to you. The biggest debt settlement players in the United States are National Debt Relief and Freedom Debt Relief. If you decided on one of these options, you may consider checking reddit on National Debt Relief or Freedom Debt Relief. You will probably always want to check National and Freedom Debt Relief reviews. For example, a common Google search term is National Debt Relief screwed me and  "Freedom Debt Relief lies", so it's important to consider how others see these debt relief players.

Which Should You Choose? 

My main question to folks is, “What are your near and long term financial goals?”. If you want to get out of debt the fastest and cheapest, you can take Ascend's free Chapter 13 calculator to help you estimate costs and timeline of both Chapter 13 bankruptcy and debt settlement.

If you want protection from creditors or you want flexibility of payment, you may choose different options potentially.

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