Debt Settlement vs. Bankruptcy: Choosing the Right Option

Understanding Debt Settlement

The debt settlement process involves a detailed negotiation between you and your creditors. This conversation aims for them to agree to your offer to pay off a portion of your debt and consider it paid. Settlement does not have the same negative consequences as bankruptcy, but it can hurt your credit score. If you choose to do this on your own, you certainly can, but it is better to hire a debt settlement company to help you deal with the stress of dealing with your creditors. Word of caution, though, when hiring a debt settlement company, only work with reputable companies and make sure they explain to you the tax implications of forgiven debt like a settlement.

Is Bankruptcy For You?

What is bankruptcy? Bankruptcy is a legal process. This can help you restructure or eliminate your debt. If you have been hounded by creditors and collectors,  filing for bankruptcy will stop them dead in their tracks. Be aware that it may give you immediate relief from your creditors, but filing for bankruptcy will hurt your credit score and negatively affect your credit report. Depending on your financial situation, you can consider filing for Chapter 7 to liquidate your assets or Chapter 13 for a repayment plan fit for your current financial capacity.

What do you need to consider?

It would help if you considered some things before filing for bankruptcy or going for a settlement deal. Here are some:

• Total debt. If you are struggling with smaller debt amounts, debt settlement may be for you. But if your debt is overwhelming, then bankruptcy may be a better option.
• Impact on Credit Score. Whether you like it or not, both can hurt your credit score, but a debt settlement will not damage it as severely as bankruptcy would.
• Legal ramifications.  Although bankruptcy can offer you legal protection from creditors, it will be reflected on your credit report for years.
• Financial goals. Before you decide between the two options, think about how each option will go well with your future financial plans and benefit you in the long run.

Don’t be afraid to seek help from trustworthy financial advisors who can help you iron out the details. They can also help you choose between Debt Settlement and bankruptcy, which is best for you.