Should I File Bankruptcy or Use Debt Settlement?

When considering bankruptcy or debt settlement, there are several factors to keep in mind. Bankruptcy is the process of asking the court system to discharge your obligation to repay the debts you have incurred. Chapter 7 bankruptcy offers full discharge of the debt, meaning that you do not have to repay it at any time. Chapter 13 bankruptcy offers reorganization of debt but may lead to some discharged debt as well. Debt settlement asks the lenders directly to forgive some of the debt incurred. Which is the right option, bankruptcy or debt settlement?

Compare Bankruptcy or Debt Settlement

Bankruptcy's main benefit is that borrower does not have to repay the debt. Besides paying for the court costs associated with bankruptcy filing and attorney fees, you do not need to have a substantial amount of money to file bankruptcy.

However, bankruptcy does have a negative impact on a credit score. Your credit report will have a negative mark noting the bankruptcy for up to ten years. During that time, you may have difficulty obtaining new loans or getting affordable interest rates. This negative impact can also affect your ability to get insurance or to get some types of employment.

Debt settlement's main benefit is that it offers a shorter period of time when your credit score will be lower. Lenders will report the settlement on your credit report. It is likely to have a negative impact immediately on your credit score. However, this is generally a shorter amount of time. Most negative marks will fall off your credit report within seven years, if not sooner.

On the other hand, debt settlement requires that you contact the borrower and negotiate a payment to settle the debt for less than what you owe. This means that you could save 20 to 60 percent of the debt, however, you do need to have the ability to repay the remaining debt in order for the lender to agree to such a settlement. Further, debt settlement is not a guarantee. Creditors can pull out of debt settlement plans or not agree to them.

Determine if bankruptcy or debt settlement is for you by considering your ability to repay debts right now. If your credit score is already negatively affected by past due debts, filing bankruptcy may be the best option for a fresh start. Others can easily negotiate a settlement for the debt with their lender and overcome the financial burden faster this way.

Getting Legal Help

Every situation is unique. When you cannot determine if bankruptcy or debt settlement is right for you, contact an attorney to help you through the decision process. Legal aid can help you to weigh the benefits of either plan in your own circumstances.