Which is Better – Debt Settlement or Bankruptcy?

Debt settlement and bankruptcy are 2 ways of getting rid of your debts. But the effect of both these debt help options on your credit rating differs. Debt settlement is a debt relief option in which your total outstanding balance is reduced to a great extent. It causes your debt load to get reduced. On the other hand, bankruptcy allows you to start afresh financially albeit with drawbacks.

Debt settlement can be done with the help of a debt settlement company. The debt settlement company will charge fees from you for negotiating with the creditors. Negotiation usually begins after you have accumulated some cash (at least 50% of the outstanding balance).

You don’t make payments to your creditors for sometime. A trust account is created and you make payments into that account. Till the time you don’t make payments to the creditors, your credit score drops to a considerable extent. On negotiation with the creditors, you get financial relief as you will now have to pay much less than what you originally owed.

Debt settlement also known as debt arbitration or debt negotiation is an important bankruptcy alternative. If your debts are reduced, you will not be required to file bankruptcy.

Bankruptcy on the other hand will damage your credit report to a great extent. And whether you file Chapter 7 or Chapter 13 bankruptcy, it stays in your credit report for a period of 7 to 10 years.

When you opt for debt settlement, your credit score undoubtedly drops but it improves as you become regular with your payments again. But if you file bankruptcy, it takes a lot of time before you can become a lender’s favorite again.

Why is debt settlement a better financial decision?
Debt settlement is definitely a better financial decision because it reduces your debts and serves as an alternative to bankruptcy. Filing bankruptcy will tarnish your credit report. For instance, if you approach a lender for fresh credit you will not be able to get one. And even if you do the rate of interest will be very high.

There are many employers that don’t recruit candidates that have a damaged credit score or file bankruptcy. You may not be able to take a rented apartment of your choice if you have bankruptcy in your credit report. These are the drawbacks of filing bankruptcy. Therefore, debt settlement is a much better option to get out of debt.

Tags: bankruptcy, Debt Settlement