Is Debt Settlement Better Than Bankruptcy?

Both debt settlement and bankruptcy are options for borrowers to consider when they can no longer make payments on debts like mortgages or credit cards. These type of debts typically require a monthly amount to pay down the loan, with interest rates included in the calculation. If the borrower can make these monthly payments, the lender is satisfied, but if the borrower cannot make payments, then the lender will see the loan as defaulted and will begin the process of seizing collateral or assets. To avoid this, the borrower should try to find a good debt settlement program before turning to bankruptcy.

Debt Settlement

• Debt settlement programs are often confused with debt management programs, but there is a subtle difference. Debt management programs help borrowers rework current debt into new payment plans and options. Debt settlement programs are offered through third-party organizations and create a forgiveness program where lenders agree to accept a certain percentage of the money owed (often 70 to 80 percent) in the new plan before forgiving the rest of the loan.

Bankruptcy

• There are two common types of bankruptcy for an individual. One is chapter 7, which authorizes the bankruptcy court to liquidate individual assets in order to pay off creditors, but then permanently forgives remaining debts. The second type is chapter 13, which initiates a payment plan that lasts approximately 60 months before debt is forgiven.

Credit Effects

• While chapter 13 bankruptcy and debt settlement programs may sound similar, there can be a world of difference on your credit report. If you file for bankruptcy at a court, this will show up on your credit report for years afterward. Lenders who look at your report to gauge your financial status will see the bankruptcy, a sign of defaulted loans and refuse to lend you money. Bankruptcy stalls any mortgage plans you may have for a minimum of two years.

  With debt settlement, creditors close accounts with words like "settled" or "paid." While your credit may still decrease, it will not be as hard-hit as it would in bankruptcy, and lenders looking at your credit report will the positive "settled" wording for your old debts.

Financial Position

• Financial position is also very important to consider when choosing between debt settlement and bankruptcy. In debt settlement, you have to continue making payments, but they are more manageable. On the other hand, bankruptcy options like chapter 7 may sell some of your personal possessions to pay back the more vital loans. You must decide if your financial situation is bad enough to choose bankruptcy.

Considerations

• Debt settlement programs can be more advantageous, but they are also the target of many different scams. Third-party organizations try to charge fees for bogus services while accomplishing nothing for borrowers. As a result, you will need to spend time researching debt settlement options carefully before making a decision. Do not pay any fees upfront for consideration instead of actual services, and look for companies that are members of the Association of Settlement Companies.