November 1, 2022

Debt Settlement vs. Bankruptcy: Which Is Right For You?

Both debt settlement and bankruptcy are options for dealing with overwhelming debt. They provide a solution for people who are in so much debt that it seems impossible to pay it off. However, it is critical to understand that both have a cost.

In this article, we compare debt settlement and bankruptcy to help you decide which option is best for your situation.

Understanding Bankruptcy

Bankruptcy is a federal bankruptcy procedure that protects individuals and businesses that are drowning in debt. It provides the quickest way to discharge many types of unsecured debt, such as utility bills, unpaid credit card debt, and personal loans owed to family and friends.

However, declaring bankruptcy does not discharge all types of debts. Child support, alimony obligations, criminal fines, student loans, and unpaid taxes are all exempt. Bankruptcy will remain on your credit report for 7 to 10 years, preventing you from receiving credit cards, purchasing a home, or obtaining a loan. There are two kinds of bankruptcy:

Chapter 7 Bankruptcy

The court orders you to liquidate a portion of your assets in Chapter 7 bankruptcy to offset your debt. Certain assets, including those required for daily living, such as your primary vehicle, furniture, and clothing, are exempt from this liquidation process. Following the liquidation, the court applies the proceeds to your debt and releases you from any remaining debt.

Chapter 13 Bankruptcy

This type of bankruptcy creates a three-to-five-year debt repayment plan that allows you to keep the majority of your property. You can keep your property if you file for Chapter 13 bankruptcy.

Effects of Filing Bankruptcy on Your Credit Report and Credit Score

Regardless of the chapter on bankruptcy, it will have a significant impact on your credit score. It can take years to repair your credit score. Furthermore, once you have a bankruptcy on your record, you will have a more difficult time obtaining loans and new credit cards.

What is debt settlement?

Debt settlement is a debt relief program that allows you to discharge a portion of your debt. When you settle a debt, you agree to pay your creditor a lump sum to cover a portion of your debt. In exchange, your lender agrees to forgive the remainder of your debt. Once your debt is settled, you must pay your debt settlement company as well as taxes on the amount discounted.

In contrast to bankruptcy, most debt settlements do not involve any court or legal proceedings. You negotiate new payment terms with your creditors and devise a repayment strategy. There are numerous types of debt relief:

  • Credit Counseling: Credit counseling agencies evaluate your income and debt accounts and recommend a solution.
  • Debt Consolidation: This debt relief option combines all your debt into one debt consolidation loan. While getting a personal loan to help consolidate debt does not reduce your debt, it makes the payment more feasible.
  • Debt management plan: You will need to make a monthly payment to your credit counseling agency. The agency is responsible for distributing the money between your creditors and closing accounts once it has paid off.
  • Debt settlement: Debt settlement, or negotiation, allows you to pay your creditors a portion of what you owe them. Most debt settlement companies charge a fee for their services, thus reducing the amount you’ll save. Also, the amount of forgiven debt is considered taxable income. So you have to pay taxes.

Does debt settlement affect your score?

The impact on your credit reports will be determined by the type of debt settlement plan you select. Calling a credit counseling service, for example, will have no effect on your credit score. Debt consolidation usually has no effect on your credit score, particularly if you make your payments on time.

A debt management plan will almost always lower your credit score. It does, however, have a minor impact on your credit scores and reports. You can repair your credit score after completing your management plan by opening secured credit cards.

Finally, the impact of debt settlement on your credit score will be determined by the creditor. If they choose not to report to your Credit Reporting Bureau, it will have no effect on your credit score. On the contrary, if they report that you have settled or “paid less than owed,” your credit score will suffer.

Bankruptcy vs. Debt Settlement: Which is a Better Option?

Given a choice, debt settlement is always the better option. However, the correct answer majorly depends on your situation.

When is debt settlement a better option?

  • You can negotiate a settlement plan with your creditors that you can afford
  • Your creditors have agreed to reduce your debt significantly in exchange for your making a lump-sum payment.
  • You have a stable enough income that allows you to continue to pay your rent, mortgage, and other essential bills in addition to your monthly debt settlement payments.

When is filing bankruptcy the better option?

  • Other debt settlement options have proved futile, making bankruptcy a last resort.
  • You are on the verge of losing your home to foreclosure, and filing for Chapter 13 bankruptcy can help prevent that.
  • Making debt payments will require you to take money out of your retirement or emergency savings accounts.
  • You’ve lost your job and lack the means to repay your debts.
  • Any attempt to repay all your debt will take more than five years.

Can you file for bankruptcy after debt settlement?

Yes. Most people who are in debt see bankruptcy as a last resort. Even if you have tried other debt settlement options, filing a Chapter 7 bankruptcy releases you from the obligation to pay the debt. This includes any debt settlement agreements they may have negotiated with their creditors in conjunction with your debt settlement.

Looking for a Bankruptcy Attorney in Media, PA? Work With Us Today!

For many years, we have been assisting families and businesses in relieving financial stress. Before filing anything with the court, our highly knowledgeable and experienced Media, Pennsylvania bankruptcy attorney will advise you of all consequences and procedures.

Contact us at 610-255-7500 if you need help filing for bankruptcy or a lawyer with experience in bankruptcy litigation.