Choosing between debt settlement and bankruptcy is a hard nut to crack when your debts are skyrocketing. However, it is significant to know that though both debt settlement and bankruptcy are there to help you get out of debt, they work in their own way and obviously have separate consequences. Therefore, it is very important to consider your options and the outcomes carefully before choosing one to get relief from your debt burden.
Know the Purposes of Debt Settlement and Bankruptcy
Bankruptcy and debt settlement more or less do the same thing. They help you get rid of your unsecured debts, such as personal loan or credit card debt. Both in bankruptcy and in debt settlement, you pay your creditors an amount less than you primarily owed.
In a debt settlement procedure, you come to an understanding with your creditors and pay an amount lower than the initial debt. The creditor, however, forgives the remaining amount. You either can hire a debt settlement company to do this for you or can also attempt to settle yourself. However, before choosing a debt settlement company, make sure it is legitimate by checking with the Better Business Bureau (BBB).
Bankruptcy filing is a court procedure that you undertake in order to shed off your debts. In a personal bankruptcy, the court determines how you will pay off your creditors. If you file a chapter 7 bankruptcy, your all non-exempt property is sold and the liquid cash is distributed to the creditors. While in a chapter 13, the court designs a repayment plan. A debtor, having a steady source of income must repay the debts within 5 years.
Effects on your Credit Score
Engaging with a debt settlement program may or may not affect your credit score. If you make some late payments and/ or carrying high balances in your credit cards, you credit score may spoil. A successful debt settlement, however, can help you save thousands of dollars, avoid bankruptcy and become debt free within one or two years.
On the contrary, filing a bankruptcy stays on your credit report for up to 10 years from the date of discharge. During that time, if you reach out to a lender for a personal loan, he/ she may decline or charge higher interest rates because of the bankruptcy on your credit report.
Considering all of these factors, it’s up to you decide which is right for you.
However, generally speaking, unless you are in serious debt with no way out, it is better to try debt restructuring before filing bankruptcy.