If you are confused between debt settlement and bankruptcy, you should read this article. We know it’s a tough choice; that’s why it’s vital to decide after reading both sides’ positive and negative points. Certain conditions define the condition of your current financial situation. For instance:
- If you are struggling with paying bills and payment of your credit card.
- Moreover, your condition is worse if you are facing threats and legal actions from creditors.
So, if you are drowning in debt, you should take immediate action to get out of this situation. Debt settlement and bankruptcy are a definition of a financial dilemma, and you will have to choose between these. Few people believe debt settlement is reasonable, but we can’t decide anything without knowing it in depth.
📌 What is the difference between debt settlement and bankruptcy?
The average American’s households carry hundreds and thousands of dollars in the name of debt. However, they want a way out of this situation, and debt settlement is the best choice. On the other hand, bankruptcy is another suitable solution for most people. Both conditions are helpful for people who are dealing with more debt. Here is the precise definition of both concepts:
“Debt settlement is a condition when you negotiate with the creditor and agree to pay less than you owe. But in bankruptcy, you go through a legal process and file a petition before bankruptcy Court.”
In the situation of bankruptcy, the court discards your debts and passes an order to create a manageable debt payment plan. Usually, the debt settlement, adjustment, and relief are handled by a third party, but you can also do it yourself.
Difference between debt settlement and bankruptcy:
You can face a financial crunch even if you have high-income skills and are earning pretty well. So, it’s always better to work on the exit plan from the start. Here are the following points that draw a line between both concepts:
| Debt settlement/Debt negotiation | Bankruptcy |
|---|---|
| It’s an agreement between borrower and creditor to reduce debt | If you can’t pay off the debts, then the bankruptcy court intervene to discharge what you owe |
| Slightly less damaging than bankruptcy | Bankruptcy impacts credit score and credit report |
| You will pay taxes on the forgivable amount | Don’t need to pay taxes on the debt amount that has been discharged. |
Paying off your loans in full is better as it doesn’t damage your credit score and report. Bankruptcy provides the fastest path to getting out the debt, but it has severe long-term impacts on the credit score.
📌 Debt settlement: An analysis with pros & cons:
Debt settlement is famous as debt negotiation or debt arbitration. So, borrowers approach this method if they have a substantial amount of cash that they can use to pay off their debts. Usually, the percentage of paid balance is somewhere between 40%-70%. Earlier, we discussed that debt settlement is a good idea. Still, it comes with positive and negative sides. However, if your monthly debt payment exceeds 20% of your income, you have a debt problem and need to act. Moreover, you can use real paystub software to keep track of monthly payments and revenues.
Pros & Cons of debt settlement:
Your plan isn’t complete and actionable without discussing the pros and cons. So, consider these positive and negative sides before getting into this:
| ✅ Pros | ❌ Cons |
|---|---|
| You can attempt to make the debt settlement on your own | Informal debt settlement can harm your credit score and report |
| If you are persistent and organized, you can clear the debt in 24-48 months. | You can end up adding more debt if creditors refuse to settle |
| The state regulates the debt settlement industry | Debt settlement services don’t offer protection from creditors’ actions; that’s why they can still pursue collections. |
| You can hire a formal debt settlement company for negotiation services with creditors. | Agencies don’t deal with government debts like student loans or taxes. |
But remember that debt settlement isn’t a quick fix. Moreover, you will pay a hefty amount for things you can’t do alone. Mostly, you will be charged and sued for late payments.
📌 Bankruptcy: An analysis with Pros & Cons
Bankruptcy is considered the final solution. So, if you want something fast, this is a better option than debt settlement. Bankruptcy only takes a few months to complete compared to settling debt which takes years. Both scenarios don’t have a good impact on your credit score, but the sooner you pay this, the sooner you can move on.
Pros & Cons of bankruptcy:
Bankruptcy is a better option if all other options have been exhausted. So, consider this option if you have lost your job and lack the means to settle the debt. But investigate these pros and cons before making any decisions:
| ✅ Pros | ❌ Cons |
|---|---|
| You can wipe off your debt | If you claim bankruptcy, then it will be on public record |
| Collection agencies will not haunt you for debt payment | It has a long-term impact on credit scores and report |
| You will not pay the debt on the discharged debt | You will have to pay a hefty amount to the attorney as a fee |
Moreover, creditors can’t file a lawsuit in bankruptcy, and this method quickly resolves debt problems. It’s not a business negotiation; that’s why there are more chances of success in settling debts.
📌 Debt settlement or bankruptcy: Which one is best?
Any form of debt affects your credit score. But if we compare both, then in bankruptcy, credit score falls immediately. But the decline in the credit report is temporary and stays on the record for up to seven years.
On the other hand, debt settlement stays on the credit report for up to six years or more. But informal settlements can severely harm credit scores if you don’t handle matters smoothly. So, even in the negotiation stage, the score can drop off, especially when you stop making payments.
📝 Note:
If the situation is worse and you can’t decide on your own, seek professional advice. This way, you can determine strategy according to your unique financial condition.
