Debt Settlement Versus Bankruptcy: Which One Should You Choose?

There are no predictable economic cycles. If there were, we would all be wealthy. The economy grows and falls as the result of numerous forces beyond our control. There are signs of risks from time to time, and some are more reliable than others. But, predicting is well outside the reach of most people.

People lose jobs. They run into huge medical expenses. They lose their nest eggs. Some commit to mortgages they cannot fulfill. Still, others accumulate debt that exceeds their ability to pay now or in the future. And, for whatever reason, they find themselves between a rock and a hard place.

In 2008, just under 60,000 people declared bankruptcy according to the American Bankruptcy Institute, a considerable improvement over the years of the Great Recession. In real terms, that can mean deciding what’s better for you: debt settlement or bankruptcy.

Between the financial rock and it’s hard place

Debt settlement and personal bankruptcy are two sides of the same coin. They solve similar problems in different ways. You can take either pay to get out of debt, but the results will affect your future differently. You need to understand what these options mean to you.

  • Debt settlement helps you address your personal finance, family finance that has gotten out of control. It does so by negotiating deals with the creditors you owe. It may not get rid of the debt, but it seeks to settle on an amount you can handle.
  • Bankruptcy is a quick way to get out of debt. A Chapter 7 bankruptcy will eliminate your debt, and a Chapter 13 version will negotiate a plan to repay your creditors. It requires the assistance of a lawyer, federal court hearings, and a lasting negative impact on your credit rating.

The potential and availability of bankruptcy as a solution encourages creditors to negotiate to settle for some return as better than no return.

Why settle a debt?

Reaching a debt settlement does not dismiss your obligation to pay your debt. But, it can reduce the size of the debt.

Negotiating with the creditor can result in your paying only a fraction of what you owe. It helps you avoid the damage that bankruptcy does to your credit record. And, negotiating payments will reduce the time and cost of bankruptcy.

But, negotiating on your own can present problems. Your creditors have no obligation to cooperate. They have the upper hand because you are contractually obligated to pay debts you incurred. So, while debt settlement might be good for you, it’s not the best option for the creditor.

Creditors are positioned to resist any suggestion you make. Still, if negotiating is their only choice when your bankruptcy could eliminate the debt, they may offer solutions. Some creditors have hardship plans which help resolve financial problems arising from personal hardships like a death in the family, major damage to your home, or catastrophic medical expenses. There is no standard solution, but you might request such a repayment plan where they accept a reduced regular payment and forgive late charges.

You might, then, prefer to use a debt settlement service that will take on the negotiations and argue from the advantage of experience and knowledge of the debt structure and possible options. The professional will save you time and represent you with consistency.

Debt settlement providers work with your creditors to reduce the total you owe to a balance you can afford. You make fixed monthly payments to the debt settlement company which it uses to pay the amount and the charges for the company’s fee, typically 20%. And, you should expect the IRS to treat any “forgiven” debt as taxable income.

Finally, you use a reputable debt collection company that does its job and without scamming you. You might confirm their Better Business Bureau rating, check the internet for their reviews like those at https://www.nationaldebtreliefreviews.com/national-debt-relief-reviews/. And determine if they are members of the American Fair Credit Council and the International Association of Professional Debt Arbitrators

Why claim bankruptcy?

Chapter 7 or Chapter 13, bankruptcy will relieve you from your debt burden, either by settling on a structured repayment plan or wiping out the debt entirely.

While debt settlement may negatively impact your credit history for years, bankruptcy will certainly lower your FICO score. Chapter 7 bankruptcy appears on your credit record for 10 years and will affect your ability to purchase a home or car and to secure credit cards. Chapter 13 will stay on your record for seven years from the delinquency. The amount of settlement or repayment plan is decided by a bankruptcy judge in terms of your state’s laws.

One huge risk in a Chapter 7 filing is the court may demand the liquidation of assets including your house and/or car. In addition, bankruptcy will not eliminate debts owed for student loans, child-support payments, or delinquent income taxes.

The real problem with either form of bankruptcy is the cost of legal representation. You can’t argue bankruptcy on your own so you can expect to pay legal fees from $500 to $6,000.

Debt settlement vs. bankruptcy: What works best for you

As the Chicago Tribune says, “While the economy has recovered to a reasonable standard, wages took a long time to get back to normal. This means that households are still carrying large amounts of debt, often at extremely high-interest rates. If you’re someone who has a large amount of debt, you might be looking for various ways to solve your problem.”

NerdWallet research reports the average American household has an outstanding credit card debt of $15,482. Add this to an average mortgage and other debts of $134,058. When you consider those credit cards accumulate debt with 25 to 29 percent interest rates, you can see how the debt becomes challenging.

Debt Settlement and Bankruptcy can both solve your financial problems. But, if you’re unsure what works best for you, you might first seek advice from a nonprofit credit counseling agency working in your interest to determine the most advantageous, appropriate, and cost-effective route to your solution.


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