Settlement vs Bankruptcy

Is debt settlement a better choice than bankruptcy?

Dealing with debt problems can be an incredibly difficult undertaking. There are a lot of decisions to be made, which can be scary or intimidating if you’ve never dealt with them before. It is absolutely imperative that you make carefully thought out financial decisions when it comes to paying off your debt. However, whatever method you are considering for getting rid of your debt, congratulations! You are taking the first step towards repairing your credit score and rebuilding a financially sound future.

One of the most important questions you must ask yourself is whether a debt settlement or a bankruptcy is the best option for your specific financial situation. There are a lot of factors that can enter into this decision, so it is important that you understand what each one is and what the consequences and benefits are for each.

Debt settlement is an agreement between creditors (or the collection agencies they have sold your debt to) and yourself in which you agree to pay a negotiated and reduced amount of the money owed in exchange for them “settling” your account. This effectively means that you will no longer be legally or financially liable for those debts, and your credit report will be updated to reflect that you have paid your debts. However, your credit report will note a distinction between “paid” and “settled”, and anyone looking at your report will know that you settled for less than the original amount. While this is ultimately better than having an unpaid item on your credit report, it is still worse than showing that the debt was paid in full.

Bankruptcy effectively erases most of your debts, including unsecured credit card debt. However, it will not remove specific types of debt, such as student loans. In addition, bankruptcy will absolutely devastate your credit score, and will reset the clock on that negative score. This means that if you have debts that are three years old and choose to file for bankruptcy, a brand new negative mark will appear on your credit score, not an update on a three year old mark.

There are a number of things to consider before making a choice between debt settlement and bankruptcy. The first thing you will want to do is obtain a copy of your credit report. You should see exactly how much you owe and to whom, and you should contact each of those entities and find out how much they would be willing to settle your debt for. You should also consider your ability to pay a settlement payment given your current income and other monthly expenses, and see if you are better off paying the settled amount or just declaring bankruptcy and starting from scratch.

While every situation is different, typically individuals who have a somewhat manageable amount of debt and enough income to pay it off in a lump sum or over time will be better off opting for a settlement. A settlement allows you to immediately begin rebuilding your credit, and looks far better than a bankruptcy on your credit report. On the other hand, for those who have an absolutely unmanageable amount of debt, filing for bankruptcy and starting from scratch can be better in the long term. Before making any decision, be sure to speak to an accountant that you trust.