Should you file bankruptcy while in Debt Settlement process?

Should you file bankruptcy while in Debt Settlement process?

By Atty. Crispin Caday Lozano

Many people do not know if they can still file bankruptcy while they are in the debt settlement or debt consolidation program.

Question:      Can I file bankruptcy while in the process of debt settlement?

Answer:        If you are in debt settlement you can still file bankruptcy.  Bankruptcy can cancel any contract you made on debt settlement without any problem.  Filing bankruptcy could take between three to six months to process.  Once the case is filed, no creditors will make a collection call or file a case in court because you are protected by the automatic stay of the court.

Question:      What are the advantages of filing bankruptcy over entering into debt settlement?

Answer:        By filing bankruptcy, you can eliminate all unsecured debts that cannot be eliminated in debt settlement.  No creditors can sue you anymore or hold you personally liable on all your unsecured debts.  Attorney’s fees are cheaper than fees for debt settlement.  If you file bankruptcy, there will be no more garnishment, no long period of negotiation and no reporting of income to the IRS. After your discharge from bankruptcy you can start fresh and begin building your credit which you can improve within one to two years. In debt settlement, you need to be late on payments for about six months before negotiation with creditors can start and you cannot build your credit until all debts are settled which may take years.

In a published article in Smart Money, Debt Settlement: A costly escape, it enumerates the dangers of debt settlement or debt consolidation.  After verifying the information published from other sources and corroborating the information with my personal experience I summarized the various findings as follows:


  1. Many creditors will escalate collection efforts once they know that a debtor is in debt settlement. They will send the account to a collection agency who will file a lawsuit to recover any money.  When the creditor takes legal action, the debt settlement companies will likely drop the account because they have to right to give legal advice or to represent a debtor in court.
  2. High fees. Debt settlement companies’ charges vary. Some charge a flat fee of $5000 or more.  Others charge about 15% to 18% of the total debt.  On the other hand some charge about 25% of the savings.  In the final analysis, sometimes it becomes more expensive than paying the creditors’ directly.
  3. Any debt forgiven must be reported to the IRS as income. If your forgiven debt is $100,000 the federal income tax and state tax could be a staggering $50,000.
  4. Some debt settlement companies do not do anything during the first two or more years of your contract. They are accumulating the monthly payments you are sending to their escrow account before starting negotiation.  Meantime they are withdrawing their fees.
  5. High dropout rates. Many consumers drop out of the contract before the company reaches a settlement with creditors.  I have many bankruptcy clients who paid thousands of dollars to debt settlement companies but they have not reached any settlement.  This made them to decide to file bankruptcy.


Note:  This is not a legal advice.  Atty. Lozano has been helping clients in filing bankruptcy since 1999.


Bankruptcy Basics


  • Bankruptcy will actually improve your credit within one year because your unsecured debts are discharged. Although the bankruptcy will be in your records for 10 years, not filing bankruptcy will make your credit even worse until most of your debts are paid in full.
  • If you are being sued by your creditors, most money judgment can be eliminated in bankruptcy.
  • Collection actions continue and you can be sued if you are in debt settlement.
  • Chapter 7 will eliminate all unsecured debts. If you are near retirement age, you must eliminate most of your debts.
  • Bankruptcy will stop foreclosure actions. If your trustee sale date is 10 days before, you can still file for bankruptcy.
  • If your salary is being garnished, you have a court case about debts or you are being harassed by creditors, bankruptcy can stop garnishment, court cases, harassing creditors and eliminate the debt.
  • Bankruptcy is cheaper, faster and safer than debt settlement which has no guaranteed success.
  • Preserve your health, eliminate stress and live a happy life by eliminating your debts which is the root of all problems.


Crispin Caday Lozano is an active member of the State Bar of California since 1999.   You can contact him at 1-877-456-9266. Email questions to  Visit our website at


Toll Free 1-877-4LOZANO for free consultation or Schedule an Appointment