When comparing debt settlement vs bankruptcy, a number of factors need to be considered before you make a decision. Debt settlement allows you to pay less than what you owe, but for some, bankruptcy is the best financial decision possible for their situation.
Focusing on Debt Settlement
Debt settlement is the process of contacting your lenders and presenting an offer of settlement in full for your debt to them for less than what you actually owe. While it is possible to cut debt down by 20 to 40 percent (or more) it is not always an easy process. Consider some of the good and bad aspects of debt settlement.
- There is no guarantee that a lender will work with you to reduce the debt you owe. They are under no obligation to do so.
- Some lenders will instead sue you for the debt you owe, especially if they believe you have the means to repay the debt.
- Debt settlement is not nearly as problematic on your credit report as bankruptcy is. Any negative accounts should be removed from your credit report within seven years.
- Debt settlement can be expensive. You will need to have money upfront to settle with lenders. Some may take monthly payments, but not all will do so.
- It does reduce the amount you pay back to your lender, but you may have to pay a fee to an attorney or organization that you use to help you to get the lenders to settle. Keep in mind that it is possible to settle your debts without the assistance of a third party.
There are two main forms of bankruptcy associated with consumers: Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy, most debt is discharged, meaning you will not have to repay it. In Chapter 13, the debt is reorganized to make it easier for you to repay over a period of three to five years, depending on your particular situation.
- Under Chapter 7 bankruptcy, you are unlikely to repay any money to your unsecured lenders including credit card companies. You will relinquish any assets that are not protected by bankruptcy exemptions so that the court can sell them to repay your lenders.
- With Chapter 13 bankruptcy, you will pay back a minimal amount of unsecured debt, if any, but you will repay any secured debts in full including your car loans. Chapter 13 is ideal for those who have valuable assets they do not wish to lose in bankruptcy.
- Bankruptcy is a negative mark on your credit report that will remain there for up to ten years.
- A bankruptcy trustee makes the final decisions about whether or not you have to repay your debt. If your debt is discharged, the lenders can no longer pursue you for repayment.
- Most people will need to pay an attorney to handle their bankruptcy case.
Comparing Debt Settlement vs Bankruptcy
Consider your own situation. How does debt settlement vs bankruptcy affect you? If you do not have the money to pay your lenders up front -which is necessary for debt settlement- bankruptcy may be a good option. On the other hand, if you have the funds to repay the debt, settling may be the best route to take.
For those who already have a very poor credit score, filing bankruptcy is unlikely to do much more harm. In fact, for many people, it allows them to get out of debt faster. Most bankruptcy cases take three to six months to file. After that time, you can work to rebuild your credit by making wise financial decisions. If debt settlement will take you years to complete as you work through one loan to the next, it may be wise to consider bankruptcy instead.
If you are still unsure which option is right for you, take the time to talk to a nonprofit consumer credit counseling organization. These organizations can help you to determine what your best option is based on your monthly income, debts and your abilities to repay debt quickly.