Debt Settlement vs. Bankruptcy! What’s your way out of financial trouble?

The recessed global economy has pushed millions of people into severe economic crisis. Most of them are suffocating under the burden of multiple debts and are unable to keep up with their payments. A number of debt relief options are available for such people. Among them debt settlement and bankruptcy are two widely made choices. Are you confused which, among the two is your option? Let’s try to find the answer.

Today debt settlement is considered as a better alternative to bankruptcy. Why?

All debt reduction programs affect your credit report. But bankruptcy seems to stay on your credit report forever. When it comes to bankruptcy you have two options: Chapter 7 and Chapter 13. While the former erases your unsecured debt, the latter is sets up a repayment plan, giving you time to repay your debts. A chapter 7 bankruptcy will be on your credit for 10 long years. Most people end up with a chapter 13 bankruptcy which stays on your credit report throughout the time you are in a bankruptcy program plus a stipulated period calculated from the date you complete the program. Debt settlement does no good to your credit score either. But as the debtor settles his account his credit score starts improving again. Your record may state “debt paid off in less than full amount” or “settled in full”. That definitely looks better on your credit score than bankruptcy does. Some debt settlement companies also offer credit repair program to erase some negative remarks on your credit report. As you can see, the overall damaging effect of bankruptcy is greater than that of debt settlement.

If you qualify for a chapter 7 bankruptcy your debts may be completely discharged. However, the change in laws in 2005 has made things difficult. If you can pay at least $100 monthly towards your debts then you will be denied chapter 7. Like countless others you will only qualify for chapter 13 and have to pay a part or all your debt as determined by the court. The amount will depend on your paying ability. With debt settlement you usually have to pay something as less as half of what you owe to your creditors. You may have to pay taxes on the amount that is forgiven. But the IRS permits insolvent tax payers to exclude canceled debts. So you need not pay taxes if you have a negative net worth.

In bankruptcy the court decides how much you have to pay to your creditors. In debt settlement you are in control. You have to negotiate debt with the creditors to reach a settlement. This is obviously a more convenient option than the previous one.

With debt settlement you can maintain your privacy. But bankruptcy means all your records will become public. Anyone (your future lenders or employers for instance) can find out your case file.

You will lose control of your assets if you are bankrupt. Moreover you cannot act as a company director nor can you obtain credit for over £250 without your creditors’ permission. Debt settlement does not have these drawbacks.

Bankruptcy can also cause trouble in terms of employment opportunities if you have a finance related job or aim to join such a job.

Bankruptcy does bring some relief to people overwhelmed with debt. But it also brings with it social stigma and mental stress. It should only be used as last resort. If you earnestly want to address your financial troubles and have a source of income then debt settlement is your solution. It is a far more honorable way to come out of debt.

Guest post written by David Brown.