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Debt Settlement or Bankruptcy: Which One is Best?


Usually, bankruptcy is hands-down more effective than debt settlement. Bankruptcy is a court-supervised process that’s guaranteed to provide relief to distressed debtors. The general bankruptcy process is outlined below. Debt settlement works on the simple principle that something is better than all of nothing. But during non-bankruptcy debt settlement, creditors usually decide how much they’re willing to take.

A Chicago bankruptcy lawyer’s negotiation skills are very important in both areas. During bankruptcy, judges usually refer any disputes about the amount owed or the dischargeability of a certain debt to mediation. The mediator ensures that both sides negotiate in good faith. Negotiation skills also loom large in debt settlement matters. A lawyer must know when to compromise and when to stand firm.


Consumer bankruptcy has basically three stages: initial filing, exemption confirmation, and debt discharge.

When debtors file their voluntary petitions, the Automatic Stay instantly stops most creditor adverse actions, such as:

  • Foreclosure,
  • Repossession,
  • Wage garnishment, and
  • Eviction.

This relief is only available from a bankruptcy court. Usually, the Automatic Stay remains in full effect until the bankruptcy judge closes the case.

Consumer bankruptcy also shields your most important assets from liquidation. Exempt assets vary slightly in different jurisdictions, but the list usually includes:

  • Retirement account,
  • House,
  • Car,
  • Government benefits, and
  • Retirement account.

After these two stages, the judge discharges most unsecured debts. Chapter 13 also includes a protected repayment period which allows debtors to catch up on past due mortgage loans and other secured debts.

Debt Negotiation

Frequently, bankruptcy and debt negotiation go hand in hand. Usually, a Chicago bankruptcy lawyer threatens to file bankruptcy if the bank doesn’t make a favorable deal. This threat may be an empty threat, because the debtor doesn’t qualify for bankruptcy or doesn’t want to file under any circumstances. However, the bank doesn’t know that.

Debt negotiation is usually successful if an attorney has a plan, the client has realistic expectations, and the bank is willing to make a deal.

Frequently, an attorney’s plan includes evidence of fraud, if any. Attorneys use such evidence as leverage during debt settlement negotiations. For example, if a mortgage broker played fast and loose with the rules, the bank may be willing to renegotiate the loan, even if this evidence isn’t strong enough to win a court case.

Renegotiation usually means interest rate reduction and maybe partial UPB (unpaid principal balance) reduction. Banks are hardly ever willing to voluntarily cancel a debt. It usually takes a court order to do that.

Finally, the bank must be willing to negotiate. Some banks have strict no-negotiation policies. They won’t voluntarily reduce debt or change the interest rate under any circumstances. Bankruptcy is usually the best option in these situations.

Work With a Diligent Cook County Lawyer

No matter what kind of financial problem you are having, bankruptcy could be a way out. For a confidential consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

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