Is Bankruptcy the Same as Debt Forgiveness?

Bankruptcy and debt forgiveness are two entirely different ways in which you can go about reducing the amount of debt you owe. It’s important that you know the differences between these two options because if you don’t, you could find yourself in even more financial problems than you already have.


Bankruptcy is a legal proceeding. You hire a lawyer and file bankruptcy in the U.S. Bankruptcy Court that has jurisdiction over the state in which you live. There are several different types of bankruptcy, including the following:

  • Chapter 7
  • Chapter 11
  • Chapter 12
  • Chapter 13

Chapter 7 and Chapter 13 are the two most popular bankruptcy types for consumers. Chapter 7 is a liquidation procedure that discharges virtually all of your consumer debt, including your credit card debt, within 4-6 months. Chapter 13, on the other hand, is a debt reorganization procedure that allows you to renegotiate your debts, develop a repayment plan, and then pay your debts down – or off – over a 3-5 year period.

If you’re a family farmer or fisherman, you may wish to consider a Chapter 12 bankruptcy that’s available only to these categories of debtors. Chapter 11 is similar to Chapter 12 but applies only to large corporations and businesses.

Bankruptcy is completely safe since it’s handled through a federal court. The main downside is that, depending on which type you choose, your bankruptcy could stay on your credit report for 7-10 years, negatively impacting your credit score and making it difficult for you to obtain new credit.

Debt Forgiveness

Debt forgiveness is a non-court proceeding in which you negotiate with your various lenders to reduce the amount of the respective debt you owe them or, in rare cases, forgive it entirely. The main problem with debt forgiveness plans, sometimes called debt consolidation or debt management plans, is that they are fraught with scammers and other companies that promise to relieve you of your debts, but in truth, often make your situation worse while charging you potentially high fees for the privilege of doing so. In other words, if a debt forgiveness plan sounds too good to be true, you can rest assured that it almost undoubtedly is.

Another downside of alleged debt forgiveness programs is that you may have to report any amounts forgiven as ordinary income on your income tax return. This, in turn, could result in your having to pay extraordinarily high-income taxes.

To get a better understanding of bankruptcy then consulting with a bankruptcy protection lawyer in Laveen, AZ from a law firm like Kamper & Estrada, PLLC can help answer your questions and concerns about bankruptcy.