Debt Settlement vs. Bankruptcy – What Should You Choose?

When you are neck-deep in debts, you start searching for ways and means to get out of it. Both of them have the ability to eliminate your debt however they are not similar to one another with regard to the cost, time and the number of loans you can reduce. When you are comparing debt settlement and bankruptcy. Here, you need to compare the basic features of each of them when you wish to compare one another. 

Debt Settlement vs. Bankruptcy

Reduce the amount of debt you owe to creditors 

Debt settlement is the process whereby you can reduce the amount of debt you need to pay to the creditors. Here, you need to stop the payments to your creditors. You may contact an esteemed debt settlement company and send them money each month.

The money you send is deposited in a savings account and paid to your creditors. After some months, they will take this lump sum and give the amount to your creditors for the settlement of your debt. If your creditors agree, they will settle your debt for a fraction of what you owe.

Once they get the lump payment, they subsequently release you from the debt. The creditors will have the incentive to negotiate with you as they fear if you file for bankruptcy, they will not get anything. 

Bankruptcy and it’s meaning 

Bankruptcy means a loss for the creditors and they will receive nothing. Debt settlement companies have negotiators who will represent you and talk with the creditors. You also have the option to negotiate on your own however in case you are busy and do not have the time to talk with creditors; it is prudent for you to opt for debt settlement.  

Bankruptcy – Chapter 7 

Bankruptcy Chapter 7 relates to personal bankruptcy and is considered to be the easiest forms of bankruptcy. Here, you need to complete some formalities and file it in a bankruptcy court. After some months of filing this paperwork, all your secured debts will no longer exist.

In order to qualify for bankruptcy, you need to pass a test that is called a means test. This test should be passed if the income you earn is lesser than the median of your state for the size of your household. You can qualify in case you do not have sufficient disposable income post costs.

You need to complete a worksheet for checking the above criteria. You can also use an online calculator for the purpose if you want to find out whether you qualify for the test. 

Bankruptcy Chapter 13 

Bankruptcy Chapter 13 is another option available for bankruptcy. This helps you to create a repayment plan that generally lasts for about 3 to 5 years. The repayment plan is based on your income, and you are able to pay back a part of the unsecured debt that you earn.

Once the repayment plan stops, unpaid debts of you are discharged. Note that Chapter 13 is available for people who do not pass the means test under Chapter 7. Here, you need to use the disposable income for paying your creditors. However, Chapter 13 lays down some limits to debts. For instance, you cannot have over approximately $394,725 of unsecured debts and $184,200 in secured debts.

In such a case, you need to speak to a bankruptcy lawyer if you cross these limits and do not qualify under Chapter 7 in this means test. 

What are the effects of Bankruptcy on your credit report?

When you are looking for a good debt settlement company, ensure you read its reviews. When you read debt settlement reviews, you get an idea about the credibility of the company.  Remember when you apply for a loan, the lender will check your credit report. You need to make your credit report look good as this will help you get the loan you seek faster. 

Chapter 7 bankruptcy stays on your credit report for a period of 10 years post-filing. Here, your credit score dips to 150 points or more. If the score is high, the credibility of the credit report falls too. 

Chapter 13 Bankruptcy stays on your credit report for about 7 years post-filing. Here, your credit score also falls. 

What are the effects of debt settlement on your credit report?

You should understand the effects of debt settlement on your credit scores. Debt settlement affects your credit score adversely as you stop making payments to creditors. You need to save money and pay a lump sum amount to the creditors. 

When you miss making payments to creditors, they will report the debts in default. If you wish to wait for 180 days, the debt gets sold to collectors. This information stays on your credit report for many years. For instance, collection accounts stay on your credit report for about 7 years. However, these creditors do not have to report adverse or negative information to credit bureaus. You have the option to negotiate with credit bureaus where they will not report it. 

You have the option of building your credit score if you make payments in time to stay out of debt.

Choosing between the two 

When it comes to choosing between bankruptcy and debt settlement, you should evaluate the emotional aspects of both. If you are looking for immediate relief, bankruptcy is the answer. The moment you file for bankruptcy, an automatic stay on the payments to creditors will come into effect.

However, with debt settlement, the creditors can still call and contact you. They can even send you letters to your address. Relief from debts can take years if you choose debt settlement. Check and see how much time can you commit to debt settlement. It often takes many years if you do not have a lump sum to pay to your creditors. Financial experts can guide you and help you in the matter.

Therefore, when you are comparing debt settlement and bankruptcy, make sure you consider the above. Compare both of them, and in case you have doubts and concerns, talk to experts when it comes to deciding between debt settlement and bankruptcy.