Debt settlement versus bankruptcy — which one should I choose?

Time is moneyAbout 80% of Americans are in, at least, one form of debt. However, when budgeting cannot help, or you’re unable to secure a debt consolidation loan, or you don’t qualify for a debt management program, it’s only a matter of time before you get sucked into the black hole of debt. At this stage, bank settlement or bankruptcy may help you solve the problem. However, before you opt for any, it’s important you understand what they entail so you can make the right choice. Bankruptcy Bankruptcy is a legal process through which people that cannot pay their debt seek relief for some or all of their debts. Declaring bankruptcy usually offers instant relief. Some of which include: 1) Creditors won’t be able to able to harass you for their money again. 2) You might even get some or all of your unsecured debts (like credit cards or medical bills) erased. However, the greatest price you’ll have to pay is your credit taking a massive hit. Moreover, bankruptcy will remain in your credit report for 7 years (under chapter 13) and 10 years (under chapter 7). Chapter 7 stays for longer because it involves wiping off your unsecured debts. On the other hand, Chapter 13 involves creating a new 3 to 5-year plan for repaying creditors. Debt Settlement Debt settlement is the process of negotiating with creditors to reduce your overall debt in exchange for a lump-sum payment. The reduced amount paid is then regarded as full payment. Unlike bankruptcy, it doesn’t require a court filing. Why would creditors settle for less? Creditors know that if you’re unable to pay your debts, you may eventually file for bankruptcy. To avoid a scenario where your debts will be wiped out by the court (meaning you won’t have to pay a dime to your creditors), they might be nudged to agree to a debt settlement. However, note that they are not obliged to agree to it. Moreover, if you’re in a situation where you cannot pay the reduced amount, then you might have to declare bankruptcy. When to Consider Debt Settlement or Bankruptcy If your monthly payments (excluding mortgage or rent) exceeds 20 percent of your income, then you have a debt problem that requires immediate attention. Knowing whether to opt for debt settlement or bankruptcy is highly dependent on your specific situation, however, having a general guide can help you start at the right place. Here’s when debt settlement may be a better path: 1) You’re able and willing to negotiate with debt collectors or creditors on a settlement plan that you can afford and stick to. 2) For your commitment to making a lump-sum payment, your creditor is willing to substantially reduce your debt burden. 3) You have enough income to keep paying for mortgage, rent, and other bills after you settle, while still have some money in your emergency fund. Declaring bankruptcy might be a better option if: 1) No other form of debt relief can get you out of debt. 2) Your home might soon be foreclosed due to missed payment. Chapter 13 may help you catch up on your payments. 3) If paying your debts will mean taking from your emergency or retirement accounts. 4) To meet up to your monthly payment deadlines, you always have to take payday loans. These loans are high-interest and will only exacerbate your situation. 5) You have no stable means of income, maybe due to unemployment. 6) Even if you are fully committed to paying your debts, it’ll take you more than 5 years. Impact of Debt Settlement and Bankruptcy on Credit Score. Your credit score determines your creditworthiness. Debt settlement and bankruptcy will damage your credit score, but to what extent?

  • Credit Score After bankruptcy

Irrespective of your credit score before filing, it will take a massive hit after declaring bankruptcy. It’ll land somewhere between 530 – 560, which is considered poor credit. Note the higher your score before bankruptcy, the higher the drop in credit score. As identified earlier, it’ll also stay in your credit report for up to 10 years for Chapter 7 and 7 years for Chapter 13.

  • Credit Score After Debt Settlement.

Your credit score will drop by 75 to 100 points. The higher your score, the more the drop. Debt settlement will remain in your credit report for 7 years. Conclusion Debt settlement and bankruptcy are solutions to the same problem — getting out of debt most directly. In debt settlement, you try to negotiate for a reduced lump-sum payment with your creditors. Bankruptcy, on the other hand, is a legal proceeding declaring your inability to pay debts. It is usually the last resort after other means of debt relief fail. We understand first hand that understanding and mitigating debt risk can be a daunting task to undertake. You’re not alone — there are options available for you. Contact us today for more information and immediate actions you can take to get this process started. We look forward to helping you in any way that we can.

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