Debt Settlement vs. Bankruptcy: Weighing the Options

debt settlement vs bankruptcyDebt Settlement vs. Bankruptcy?

Choosing between debt settlement and bankruptcy in while facing a huge pile of debt is a tough decision to make. It is important to understand that although both debt settlement and bankruptcy offer Debt Relief, they work very differently. In order to make an informed decision, you need to understand the difference.

The Proccess of Debt Settlement & Bankruptcy:

Debt settlement is a debt reduction program where the creditor accepts a reduced amount from the debtor, in order to settle the account in full. A great Debt Settlement Program can and will settle your debt for 50% or less of your total debt. Once you have completed the Debt Settlement Program, the creditor will report your account to the Credit Bureau as “settled” or “paid”.

Bankruptcy is a court based procedure, which is initiated by the debtor. Consumers are permitted to file personal bankruptcy under Chapter 7 or Chapter 13 of Title 11 of the Federal Bankruptcy Code.

During Chapter 7 Bankruptcy, the court sells off your non-exempt assets and uses the proceeds to pay your creditors. Remaining debts are discharged by the court and you are declared debt-free.

Chapter 13 bankruptcy is a reorganization of your existing debts. The court appointed trustee will set up a repayment plan to help you pay off your debts comfortably within 3-5 years.

Once your bankruptcy is complete, you are relieved of all debts and allowed to rebuild your finances. However, bankruptcy procedures are usually much more complicated compared to debt settlement.

How will Debt Settlement and Bankruptcy effect on your credit score?

Bankruptcy can hurt your credit score by 200-250 points. The total extent of the damage depends on the nature of the other negative remarks you have on your credit report. Bankruptcy remains on your credit report for 7-10 years, which will prevent you from getting credit in the future.

Debt settlement will lower your credit score at first, but as you keep making payments on time, your credit score increases.

So, which option is better?

Debt settlement is preferable to bankruptcy if you are able to make a reduced monthly payment. You should explore all possible debt relief options before you file for bankruptcy.

Debt settlement gives you the following benefits:

  • You pay less and get rid of your debts completely!
  • You will get out of debt much faster!
  • You avoid losing your home and car!
  • Debt settlement does not damage your credit score as badly as bankruptcy does!

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