Debt settlement vs bankruptcy – a brief comparison of pros and cons and the effects both have on your credit score.

DEBT SETTLEMENT

Debt settlement is negotiating a settlement with your lender (credit card/Bank) for monthly payments with or without additional interest or a lump sum payment on a reduced balance. At the point when negotiations are finalized, the terms are expressly stated in an Agreement. The Lender usually reports this settlement on your credit report as “settled for less than full amount.”

 

BANKRUPTCY

Bankruptcy is a Federal Law that gives an “honest but unfortunate debtor” a “fresh start.” Debtors get a discharge of all their debts. A discharge is a legal forgiveness of debts. Creditors are prohibited from collecting discharged debts, and can be punished by the Court if they attempt to do so.

CREDIT SCORE

A Credit score is a number between 0 and 850 that is reported on your credit report. Your credit score depends on various factors. It is a mathematical articulation of how you handle your debts [do you pay timely; do you have too much debt, etc.]. The credit score assists lenders to determine whether you will pay your debts as per the contract.

DEBT SETTLEMENT VS BANKRUPTCY

There are advantages and disadvantages to Debt settlement, and the same can be said about filing for bankruptcy. The decision you make will determine your future financial life.

Bankruptcy offers the quickest way to get rid of your debts. However, the fact that you have filed a Bankruptcy remains on your credit report for 7 to 10 years.

Debt settlement can be accomplished in a courtroom setting once a lawsuit is filed against you by the creditor or you can settle your debts directly with the creditor prior to the filing a lawsuit against you. A settlement is not an entitlement and your creditor is not mandated by law to negotiate with you. However, most creditors will engage with you to resolve the debt as it is beneficial to both parties.

Most individuals file a Chapter 7 or a Chapter 13 Bankruptcy.

A chapter 7 Bankruptcy is filed by individuals who have no assets but plenty of unsecured debts (credit cards, medical bills, broken leases, etc.). A Chapter 7 Bankruptcy lasts about 4 months.

A Chapter 13 Bankruptcy is a Reorganization in which the individual comes with a Plan to pay back his/her creditors over a 36 month or a 60 month Plan.

Pros of Debt Settlement.

 

• Access to free credit advising that can assist you with making and arrange a repayment plan.
• Pay a portion of what you owe to become obligation-free.
• Use a debt settlement company to negotiate with your creditors.
• Save on legal fees.

Cons of Debt Settlement:

 

• There are no guarantees that a creditor will negotiate with you.
• If you default on the settlement the creditor may enforce its rights to collect the entire amount owed and negate the settlement agreement.
• Your credit score will not improve for at least 7 years.
• You will owe Federal taxes on the debt that is forgiven.
• Debt settlement companies charge as much as 25% of the total debt as fees.
• You will not get a mortgage to buy a home while you are in a debt settlement program.

Pros of Bankruptcy

• Discharges most debts and gives you a “fresh start.”
• No taxes are owed on the forgiven debts.
• Creditors are prohibited by law from collecting discharged debts.
• Debts are discharged in 4 to 6 months.
• Creditor score improves within 12 to 18 months.
• You can purchases a new car one day out of Bankruptcy.
• You can get a mortgage to buy a home in 24 months.
• You will get new credit cards within 3 to 5 months out of Bankruptcy.
• Cons of Bankruptcy

 

• The fact that you have filed a Bankruptcy will remain on your credit report for 7 to 10 years.
• Certain employers will not hire you: Banks, Home Depot and other retailers.
• If you have non-exempt assets they may be liquidated by a Trustee.

 

Conclusion: Debt Settlement vs Bankruptcy: Which is Better?

If you have no assets or below median income and plenty of unmanageable debt, then Bankruptcy is the best solution.

If you own assets [stocks, bonds, investment real estate, etc.], and have debts, then a debt settlement program is best for you.

PS: It is best to consult with an attorney as to what option is the best. Many attorneys offer Free Initial Consultations.