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Chapter 13 vs. Most Debt Settlement Programs

Too Much Debt? Consider: Chapter 13 vs. Debt Settlement Programs which include building a “War Chest” for settlement negotiations.

If you are one of the many Americans struggling with overwhelming debt, selecting the path to financial freedom can feel like choosing between a rock and a hard place.

Often, people choose between two commonly available options: Chapter 13 bankruptcy and debt settlement programs with “savings plans”. Both offer very different approaches with distinct advantages and disadvantages.

The key differences may help you to decide which strategy is best for you.

Chapter 13: A Court-Ordered Repayment Plan

Chapter 13 bankruptcy involves filing a petition with the court. A court-appointed trustee oversees the creation of a repayment plan, typically lasting 3-5 years. You’ll make monthly payments to the trustee, who then distributes the funds to your creditors according to the plan.


  • Legally sanctioned, statutory program
  • While impacting credit score, usually stops credit score reduction.
  • Immediately stops creditor harassment and lawsuits.
  • Allows you to keep your assets (like your car or house) if you’re current on the mortgage/loan or will.
  • Prevents foreclosures and repossessions.
  • Provides a structured, court-approved path to debt repayment, including arrears on mortgage, car payments, most taxes.
  • Can provide a plan to pay delinquent child support and other domestic relations related obligations.
  • Includes all creditors, not just ones willing to voluntarily cooperate.
  • Lesser impact to credit score because payments are not halted for several months before a solution is available.
  • Legal fees generally spread across the term of the payment plan.


  • Hurts your credit score for up to 7 years.
  • Can be complex and legal guidance is recommended.
  • There are limitations on the types of debt eligible for repayment.

Debt Settlement with Savings: “Stockpiling for Negotiation”

Debt settlement companies often recommend pausing payments to creditors and instead diverting those funds into a dedicated savings account. Once a lump sum is accumulated, the company negotiates with creditors to settle the debt for a fraction of the original amount.


  • Potentially faster payoff than Chapter 13 (3-4 years on average).
  • May lead to a smaller overall debt repayment, but not necessarily.


  • Cannot stop foreclosure.
  • Cannot stop repossession.
  • Some creditors may not participate.
  • May actually cost more than filing for bankruptcy.
  • Credit score takes a major hit (can drop 100+ points or more) due to cessation of payments to creditor while “war chest” is built.
  • Credit remains tarnished for 7 years or more.
  • Risk of creditor lawsuits if payments stop.
  • Requires discipline to save consistently and may not be successful if creditors refuse settlements.
  • Fees can exceed those charged in bankruptcy.
  • Not likely to recover your payments, if you decide not to proceed.

The Bottom Line

Chapter 13 offers a court-sanctioned safety net and a chance to save your assets, but it takes longer and still damages your credit. But consider that if you are behind on your obligations, your credit is undoubtedly damaged already.

Debt settlement can be quicker and potentially cheaper, but it comes with significant risk and a bigger credit score blow.

Alternatives to Consider

Credit counseling: Non-profit credit counseling agencies can help you develop a budget and negotiate with creditors directly, often for free or for a minimal fee.
Debt consolidation loan: This can simplify your payments by combining multiple debts into one loan, but requires good credit and could increase your overall interest paid.

Choosing the right path depends on your individual circumstances. Consulting with a credit counselor or bankruptcy attorney can help you weigh the pros and cons and make an informed decision. At Gudeman & Associates, P.C., we can help you make the best choice for your circumstances.

Let’s Talk AboutYour Financial Future. Call For A Consultation.

For trusted help in matters of bankruptcy, estates, business, taxation or real estate, we encourage you to contact us for a no-obligation consultation. During our first meeting at our Royal Oak office, over the phone or via videoconference, you will be introduced to your main point of contact who will work closely with you throughout your case. We will take the time to listen to your story, answer your questions and develop a plan for success. No judgment, just advice geared toward your financial goals backed by decades of experience.

Please call 248-927-2755 or send us an email to learn more or to schedule an appointment. We look forward to serving you.

Gudeman & Associates, P.C.

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1026 W. Eleven Mile Rd.
Royal Oak, MI 48067


New Clients: 248-927-2755
Existing Clients: 248-546-2800
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Royal Oak, MI 48067

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