Should I Choose Debt Settlement Over Bankruptcy?

The recent economic depression has pushed millions of people into a deep and dark financial hole. In their quest to get out of debt, people often resort to debt relief programs. Debt settlement and bankruptcy are two of the more popular programs, but people often get confused when it comes to choosing between the two. So which is a better choice -bankruptcy or debt settlement? Let’s discuss.

Your Credit Score is at Risk

All debt reduction programs including debt settlement and bankruptcy have negative effect on your credit score. If you opt for debt settlement then your credit record will state “Settled in full” or “debt paid off in less than full amount”. This will definately make it difficult for you to get loans on reasonable terms in the future. Nonetheless, your credit starts improving once the account is settled. If you decide to hire a debt settlement company then it might also help you to repair your credit.

Bankruptcy Kills Your Credit

Bankruptcy, however is a different proposition. It looks even worse on your credit report than debt settlement  and the consequences of filing bankruptcy can be deeper. A chapter 7 bankruptcy will eliminate your unsecured debt but it will stay on your credit report for 10 years. A large number of people end up with chapter 13 bankruptcy which is no better. Your credit report will bear its mark throughout the bankruptcy program as well as for a specified time which is to be calculated from the date you complete the program.

Qualifying for a Chapter 7 bankruptcy means that all your debts may be eliminated. Unfortunately, it has become quite difficult to qualify for chapter 7 since the change in laws in 2005. Can you afford to pay $100 a month towards your debts? If yes, then you are disqualified.

If you qualify for chapter 13 bankruptcy then it even worse. In this case, you need to pay whole or a considerable part of your debt as determined by the court. However, it’s usually a three to five year plan and after this period the unpaid debts are erased.

The Difference between Debt Settlement and Bankruptcy

Debt settlement is just a process to get out of debt. Bankruptcy, on the other hand is more than a debt relief program; it is a social and economic stigma and will affect your life long after it’s over. It may even endanger your future employment opportunities. Some employers, especially in the financial sector, are inclined to believe that, bankruptcy is an reflection of lack  of responsibility on your part. They are, therefore, reluctant to hire people who have a history of bankruptcy.

Advantages of Debt Settlement

If you opt for debt settlement then a large part of your debt is forgiven. Mostly it is 50% of what you owe to your creditors, sometimes even less. The amount pardoned depends on your financial situation, negotiating skills and the lenders. Remember that you may have to pay taxes on the money you save.

Debt settlement is a rather private affair between you and the creditor. Filing bankruptcy, on the other hand, means that your financial records are now accessible to everyone. Your prospective employers or future lenders can very well find out all the data which would do you no good.

Debt settlement is a faster process and can get you out of get pretty quick. It may be over in even six months if you manage to gather a lump sum payment for your creditors. Bankruptcy however is a time consuming and lingering process which may take even five years to complete.

What’s the Best Choice?

Both debt settlement and bankruptcy are for people living who are living on the edge. However, the former is a relatively better option with lesser odds. It is generally agreed that bankruptcy is a last resort. So if you manage to settle your debts then avoid bankruptcy by all means.

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