Debt Settlement vs Bankruptcy: Which is right for you?

When you have started comparing debt settlement vs bankruptcy, you might be in a financial dilemma, as the choice between the two is that one is the sharp stick in the eye while the other is a punch in the gut. If you’re buried under extensive debt both of them offer the solution to the same problem. Also choosing the right option may be the hardest thing for you at this point of time. 

Imagine that you have reached the end of the rope when you go to the maxim, tie a beautiful knot, and hang on. The good advice is that you still have rope left and make use of the of little bit of the rope you have left with so it’s better to quickly grab the hold of debt settlement vs bankruptcy.

Debt Settlement vs Bankruptcy – Key Similarities and Differences

Let’s first delve into the similarities between debt settlement vs bankruptcy. Both of them are designed specifically to erase or lower certain amounts of debt. Both of them affect your credit score to a greater extent but since they are the last resort to pay off the debt for you, you have to weigh the pros and cons of each before making a suitable choice.

To know about the differences, it is important to consider that debt settlement is often regarded as a private negotiation between the lender and debt settlement company where you are represented as an attorney. Debt settlement is a private transaction that lays emphasis on getting the terms of the debt you owe to be revised with low-interest charges. Once you have settled your debts, it is also reflected on the credit report.

While on the other hand, bankruptcy falls primarily into two major types including straight liquidation of assets and reorganization. Both involve the court as the judge is one who ultimately decides the outcome and both of them are part of the public record. But once you qualify for bankruptcy then the creditors would stop bothering you for the money. That’s not the case with debt settlement, during the settlement process, the collection calls and mail demands surge with over-limit fees continue to accrue with no solid guarantee that you will have a successful outcome. But in few cases, debt settlement will also end up in bankruptcy.

Debt Settlement vs Bankruptcy – A Basic Overview

Before delving into the pros and cons of both terminologies, firstly let’s consider the basic overview of debt settlement vs bankruptcy.

Debt Settlement

Debt settlement is also referred as debt negotiation and debt arbitration should not be confused with the debt management plans. In debt settlement, either you or your representative will try to negotiate with the creditor to accept a portion of the total balance as the payment.

If individuals are trying to negotiate for themselves and have enough cash in their pocket, they could give it a try to debt settlement. The cash will be used to pay a substantial amount of account balance, which is in the range of 40-70 percent of the total amount.

When you are plagued in debt and don’t know how to sort things out turn to the outside debt settlement candidate who will work on the following steps to reach the end goal of debt settlement

• Analyze the budget of the client
• Order them to make no further payments on their unsecured debt that include personal loan , credit card loan , student loan among all others
• Order them to make regular monthly deposits that are to be placed in an escrow or account
• Make use of the accumulated money to make an offer to the creditor to settle the debt
• Debt settlement companies charge 20% -25% of the original debt. In some cases, if the debt settlement won’t work the fee charges are non-refundable

In a comparison of debt settlement vs bankruptcy, debt settlement is a lengthy process and will done great damage to your credit score. If you need immediate relief and do not have the money to pay off the monthly payment , it is preferable to go with bankruptcy.

5 Best debt relief companies for debt settlement

If you are in US and is looking for the best relief companies for debt settlement , then you can check the detailed blog. Overall the best relief company is Accredited debt relief with a large client base and satisfied customers .

Bankruptcy

 Bankruptcy also referred to as straight bankruptcy and liquid bankruptcy is where you gather all your financial records, bank statements, pay stubs, loan documents, and credit card statements and then file the bankruptcy petition along with other documents are filed with the court.

Once it’s approved by the court, all your assets except certain “exempt” property are retained to assist the fresh start and are sold by the trustee appointed by the court, and the money is distributed to the creditors who have filed the legal claims. 

Debt Settlement vs Bankruptcy: Pros and Cons

Pros of Debt Settlement

•  If you have the habit of sorting things on your own then you can attempt debt settlement on your own. This way you can talk to the creditor, explain the financial situation, and attempt to settle for less fee , while saving the cost of debt settlement companies
• If the process of debt settlement goes well you have a higher chance to pay off debt in the duration of 24 to 48 months. If the fraction of what you owe lies between 30%-50%.
• Generally states are the one that regulate the debt settlement industry, therefore it is important to know the laws regarding upfront disclosure of fees and services also the risks and perks associated with it .
•  When comparing debt settlement vs bankruptcy, the fiscal calamity will come in the credit report for a shorter duration as compared to bankruptcy, which stays on the report for an extended duration of 10 years

 Cons of Debt Settlement

•  If your existing debt is substantial $5,000 or more, you might get sued , if you lose in court and can potentially damage your assets
• The credit score will take a beating and this will be on your credit report for the duration of 7 years
•  As some creditors will refuse to work with the debt settlers, in this case, the end resort is to file for bankruptcy.
• You may drop out before the end of the debt settlement program that could leave you with greater debts.
•  It is more likely that the creditors you will try to settle debts will close your account completely.

 Pros of Bankruptcy

•  Through bankruptcy, the filers get immediate relief from the debt collectors who are continuously calling or emailing the filer
•  Through this way, your debts will likely be erases
•  Although the credit score will drop initially in the span of few months, the credit score will improve substantially
• By filing bankruptcy, you can prevent your utilities from being shut down for non-payment
• The immediate stay provision through bankruptcy can prevent your car from being repossessed, as you can restructure your car loan
• Once your bankruptcy is discharged, you can add yourself as an authorized user and can reestablish creditworthiness through a secured credit card.
• Through bankruptcy, you can avoid foreclosure of your mortgage home

Cons of Bankruptcy

• If you are steadfast to keep your credit score above 690, then you won’t be able to due to bankruptcy
• There is a limitation on the number of times you can file bankruptcy, it would be no more than once every eight years
•  Bankruptcy stays on your credit report for a tenure of 10 years. As it is court processing it stays on record for a long duration
• As per the state rules and regulations, valuable assets like cars, jewelry, home can be liquified to pay the existing debt
•  The trustee who is appointed to review your case will review your financial history for any fraudulent and illegal property-selling activities you are involved.
•  Only the tax debts that are older than the tenure of three years can be discharged but first you have to demonstrate

Debt Settlement vs Bankruptcy: Impact on Credit Score

When making a comparison between debt settlement vs bankruptcy, both of the approaches potentially reduce your creditworthiness and FICO scores for years. While debt settlement will stay on your credit report for the tenure of seven years, which is a lengthy duration. While on the other hand bankruptcy, which chapter you file under will keep bringing your credit score down.

In the case of bankruptcy, the higher the credit score is the more it will fall with the passage of time .No matter where is starts it will fall below the range of 560, which is regarded as poor credit score. Bankruptcy will remain on the credit card for the duration of 10 years.

As bankruptcy is fully regulated by laws so when your case is settled it will completely clear your debts. Also, the bankruptcy judge will decide how much you need to repay based on the legal laws in your state. 

Debt Settlement vs Bankruptcy: Cost

When making a comparison between the two debt settlement vs bankruptcy, bankruptcy will cost you more time and money.  Let’s discuss the fee details of both in this debt settlement vs bankruptcy comparison

Bankruptcy Fees

 The regular bankruptcy charges are as follows

•  Pre-bank credit counseling course enrollment charges range from $10-$50
• The bankruptcy filing fee is almost $338
•  The pre-discharged debtor education course is usually in the range of $10-$50
•  The attorney fee differs according to the type of bankruptcy you opt for

For individuals to file bankruptcy for the first time, the laws might be complicated to comprehend. There is a lot of paperwork involved, so it is better to seek the help of a professional bankruptcy attorney.

 Debt Settlement Fees

On average, people are able to pay off 58% of what they owe in the debt settlement. If you are striving hard to settle the debt on your own, then you can save a huge chunk of money. If you have hired the debt settlement company you have to pay almost 15% of the original debt. 

For instance, if you are trying to settle an amount of $20,000 in debt and settle for 58% of the debt then you will pay $11,600 as a settlement. The charges on this plan for the debt settlement would be $3,000 which could potentially pile up the total amount to $14,600 overall.

Debt Settlement vs Bankruptcy: Which is best for you?

 As each person has a unique financial situation concluding and declaring one preferable over the other is not preferable. When making a comparison between debt settlement vs bankruptcy, try to weigh down the pros and cons.

 On a general note, bankruptcy requires a lot of paper work and at the same time, you would be able to get free legal help and the fees can be waived by significant portions. Moreover, debt settlement is private and will end up paying you less than what you owe. But in this case, you should possess lump sum payment to pursue debt settlement.

 Frequently Asked Questions