Does Debt Settlement Trump Bankruptcy?

If you are knee deep in overwhelming debt and heading straight towards bankruptcy, hold on your breath and think twice as other alternatives are there which can help you to pay down your debts faster, without affecting your credit as severely as bankruptcy does. Debt settlement is one such alternative, which can enable you to come out of the labyrinth of debts legally by paying much less than what you actually owe. In maximum cases, debt settlement is considered a safer option than bankruptcy because bankruptcy always has a social stigma attached to it which often spoils the filer's reputation in the credit market. In addition, bankruptcy remains on your credit report for almost 7 years and it's perhaps a death blow on your credit score. As settlement involves none of these pitfalls, many consumers prefers settlement over bankruptcy. However, it's best to look at the pros and cons of both debt settlement and bankruptcy, before signing the dotted line. Read on to have a quick look at debt settlement and bankruptcy debt relief plans.

Bankruptcy

The best thing in Chapter 7 bankruptcy is it gives you a financial fresh start and the court no longer hold you responsible to pay back the debt amount. Under chapter 7 bankruptcy, a court appointed trustee liquidates all your non-exempt assets and disburse the money among your creditors. They can seize your automobiles, home, place of business and even personal items such as jewelry and can put them up for sale to recoup the debt amount. As per chapter 13 bankruptcy, you can reshuffle your unsecured debts like credit cards and your secured debt like a home loan and can form a new repayment plan based on your convenience and monthly income. According to this new repayment plan you agreed to pay back the debt over a three- to five-year period. Good news is none of your assets are sold off in Chapter 13 to repay your debt and as long as you make timely payments, on your court approved new repayment plan, the creditors won't be allowed to reclaim your assets or take any legal action against you. However, the greatest pitfall of both chapter 7 & Chapter 13 is they close up your credit accounts abruptly, which affect your credit report adversely.

Debt Settlement

With a debt settlement plan, you can reduce the outstanding balance you owe and can waive the rest of the balance completely. By settling your debt, you can write off almost 40% of your debt. The creditors accept this reduced amount as full and report the credit bureau as paid off. However, credit card settlement has some pitfalls as well. If the amount forgiven by your credit card company is greater than $600 you are required to report it as income on your taxes and your credit account also get closed as soon as you settle your credit card debt. It's true that settling your debt can also affect your credit some way or the other, but this damage is minimal in comparison to the impact that bankruptcy has on one's credit score.

To conclude, a bankruptcy remains on the credit report for almost ten years and on the public record forever. The credit scores of a bankrupt individual is almost impossible to retrieve and therefore it becomes difficult for him to avail new credit, health insurance, utility services or even employment in future. Opting for a debt settlement plan is wiser choice than filing bankruptcy in terms of credit. It is highly recommended to seek legal help and assistance, before applying for any of these debt relief plans.