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Debt Settlement & Bankruptcy: When Should You Consider Bankruptcy Instead?

Debt Settlement & Bankruptcy

The current economic climate is really making it tough for people to manage their finances. Almost every necessity out there is now double the price than what it used to be. The same is the case with interest rates, they are increasing at the pace of a skyrocket making debt more expensive than ever. In simpler words, if you are feeling overwhelmed by debt, know that you aren’t alone and almost everyone’s facing the same problem nowadays. Fortunately, there are ways to eliminate or reduce debt, you just first need to learn about them in detail to make a wiser decision.

Two of the most common solutions are; debt settlement and bankruptcy. Both offer the relief you need from your piled up debt but they work differently fundamentally. Moreover, it’s important to understand that no matter which debt relief option you choose, it comes with certain consequences. Especially if you are stuck between debt settlement and bankruptcy, you should do thorough research to know when bankruptcy is the better option for your financial future.

Understanding Debt Settlement

Debt settlement is a financial strategy where the borrower negotiates with the lender to reduce the debt and in return, you have to pay the lender a lump sum amount of the debt as per the agreement. This can be done on your own or you can involve a third party debt settlement company. However, you must know that no lender is obliged to accept your settlement offer. Moreover, in a debt settlement, you have to stop making the payments to show a delinquent account and this move can have a negative impact on your credit score.

Pros And Cons Of Debt Settlement

Here are some potential benefits of choosing debt settlement to resolve your debt;

Potential downsides you must consider;

Understanding Bankruptcy

Bankruptcy is more like a legal process where you get your debt eliminated or restructured under the supervision of a federal court. When it comes to consumer bankruptcy, the two most common types are; Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is also known as liquidation bankruptcy. In this type, your non exempt assets will be sold out to pay off your creditor. Any of your unsecured debts like medical bills or credit cards are discharged. It takes a total time of 3 to 6 months to complete the process.

Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, you basically restructure your repayment plan. In this type, you have to propose to your creditor a 3 to 5 year repayment plan and if you keep up with the plan, you won’t have to worry about losing your assets.

Pros And Cons Of Bankruptcy

Bankruptcy is definitely a powerful financial tool but it does come with some trade offs. Let’s first talk about its benefits:

Here are the drawbacks of filing for bankruptcy:

When Is Bankruptcy The Better Option Than Debt Settlement?

Both bankruptcy and debt settlement hold their own benefits but in some situations bankruptcy becomes the better option especially when;

1-You Are Under Massive Debt That’s Not Possible To Repay

If you have a massive amount of debt and realistically it’s impossible for you to repay it even with your assets or partial payment then bankruptcy is definitely the better option. It’s a more permanent solution that can resolve your debt.

2-Your Lender Is Garnishing Your Wage Or Suing You

The main downside of a debt settlement is that you are never sure if your creditor will agree to your offer or not. Your lender has all the rights to sue you or garnish your wage in case you aren’t able to repay your debt and this is where bankruptcy can work wonders for you. It can impose an automatic stay and it’ll halt all the collections immediately.

3-You Are Facing Foreclosure, Eviction Or Utility Shutoff

Debt settlement doesn’t guarantee anything and it doesn’t protect you from losing your assets or evictions. On the other hand, bankruptcy does come with these benefits as you are allowed to keep your home and restore your daily life services during the filing.

4-You Can’t Even Afford To Make A Lump Sum Payment For The Settlement

For a successful debt settlement negotiation, you first need to have a lump sum prepared to make the offer to your creditor. If you are already living paycheck to paycheck and don’t have the kind of money to give as a lump sum then you obviously need to consider bankruptcy.

5-Most Of Your Debt Is Unsecured Debt

If you are dealing with unsecured debt then bankruptcy is the better option as it helps discharge unsecured debts specifically. This includes medical debt, personal loans and credit cards.

6-You Want A Faster Way Out

Debt settlement is a one long process that can take months and sometimes years. On top of that, you don’t have any guarantee of positive outcomes. On the other hand, Chapter 7 bankruptcy helps you resolve your debt in just a matter of a few months.

Key Differences Between Debt Settlement and Bankruptcy

The best way to describe the difference between a debt settlement and bankruptcy is that one is a formal legal filing and the other one is an informal negotiation process. Here are some more differences;

In a nutshell, the right option depends on your circumstances and the type of relief you are looking for. If you want to get out of debt faster then of course bankruptcy is the better option. However, if you want to protect your co-signer and don’t want to be a part of any legal proceedings then you should opt for a debt settlement.

Final Thoughts

Deciding between debt settlement and bankruptcy is never easy. However, for the safety and security of your financial future, you must be honest with yourself about your financial situation. It’s important to be realistic during such times. Especially if you think that your debt is manageable and things are getting out of your hand then bankruptcy is definitely the right option here.

Before finalizing anything, it’s best if you talk to a bankruptcy attorney or a certified financial counselor who can evaluate your financial situation and propose a better solution that’ll work in your favor. In order to make an informed decision that aligns with your financial goals, you must consult a professional like Mountains Debt Relief. With years of experience and expertise in this field, the company can provide the best consultation and services for a seamless and smooth debt-free journey.

FAQs

Q1. Is It Better To Give Debt Settlement A Try Before Filing For Bankruptcy?

The answer depends on your financial situation. If you can manage a lump sum to settle your debt then you should obviously give it a try first but if the debt is unmanageable and you don’t see yourself paying it anytime soon then filing for bankruptcy can save you from a lot of legal trouble.

Q2.How Long Does Bankruptcy Take?

When it comes to Chapter 7 bankruptcy, you’ll have to wait for 3 to 6 months and in Chapter 13 bankruptcy, as it’s a repayment plan, you’ll have 3 to 5 years to become debt free.

Q3. Is It Possible To Rebuild Credit After Debt Settlement Or Bankruptcy?

Yes, fortunately, you can build your credit back. Both debt settlement and bankruptcy can wreak havoc on your credit but it’s not permanent and by paying your bills on time, showing a financially responsible behavior and keeping your credit utilization ratio low, you can bring your credit score back on track.