Debt Settlement vs. Bankruptcy

Almost everyone will fall into debt at least once in their adult life and most will incur debt multiple times. Either through circumstances outside of their control, such as medical issues or property damage, or through something they chose to do, such as making a large investment that didn’t pan out, purchasing something outside of their current ability to pay back, or falling victim to the temptations of overusing a credit card. A large number of people fall into this trap.

When this happens, understanding your options and how to dig your way out of this stressful and difficult place is like finding a light at the end of the tunnel. Typically, for severe cases, there are two options you can choose to rebuild your financial foundation. One of these is a long and difficult road that will require strict budgeting. The other may seem like a far faster way out, but the consequences could last for a decade.

 

Bankruptcy

This deceptively faster option is bankruptcy and it’s a drastic step that a large number of people find themselves. In fact, 772,646 bankruptcies were filed from the end of March 2018 to the end of March 2019 according to the Administrative Office of the US Courts. It’s a legal process within the courts to offer people a way out of crushing debt. There are two types of bankruptcy that people file for their personal debts, Chapter 7 and Chapter 13.

  • Chapter 7

This type of bankruptcy is when you have a trustee that oversees the liquidation of your assets to pay for your debts. This is often the hardest to keep private and can result in the loss of property and the equity in your property, including your primary vehicle and work-related equipment. While the loss of property is hard to swallow, even harder to swallow is the following 10 years a Chapter 7 stays on your credit report, affecting any planned future borrowing needs, where you can rent, and even your insurance costs.

  • Chapter 13

This is the easier of the two, allowing you to keep your property and assets as long as you can establish a payment plan. This should definitely be discussed with a lawyer to be certain you’re making the right decision. If not, you may find yourself worse than before. A payment plan will likely last no more than 5 years and any outstanding debts will be cleared as long as you’ve made all the agreed payments. However, Chapter 13 will stay on your credit report for 7 years.

 

 

Debt Settlement

Debt Settlement is something different. There’s no legal process or court ruling involved. It’s simply settling with creditors to pay a lower amount by agreeing on a payment plan. It may seem like a long shot that a creditor would agree to a lower amount than what’s owed, but under the extreme circumstances that would require such a settlement, the creditor fully understands that you could file bankruptcy and they won’t be able to collect after that. To meet halfway and get what they can, they are willing to settle for a lower amount as long as you pay as agreed. While this will lower your credit score, you won’t have the lender repellent word, ‘bankruptcy’ stuck to your credit report for years. You’ll be able to build your score and history through smart financial decisions.

Anyone who has a regular income and is willing to try and pay their debts should consider Debt Settlement to save themselves the lengthy and highly impactful smear that a bankruptcy leaves on their credit report that will raise interest rates and cause other problems.

Things to remember about debt settlement

  • There is help available

It is possible to agree to a settlement yourself, but it’s also possible to find a good debt settlement firm to help you. If you’re uncertain of how to proceed or you don’t think you will be able to come to an agreement that will work for you on your own, it’s important to find a trustworthy and reputable firm.

  • Beware of scams

While there are debt settlement firms that will work to help you, there are also many scams that will take advantage of you. If you fall into their trap, you’ll end up in a worse financial strain than you already were in.

  • You must be willing to follow the agreement

While Debt Settlement is the preferred method of finding a financial solution, it does usually take more work on your part. You will need to budget accordingly and you must make sure to make the payments agreed on.

  • Don’t avoid it

If something happens that changes your income or financial situation, it’s also important to communicate with those you’re working with. One of the worst things you can do is hide from creditors or your debt settlement firm.

 

Sometimes debt is just a natural part of financial goals. Buying a home and getting married are some things that cost a great deal, more than what most people have to spend, and they need to borrow from a bank. The majority of people couldn’t buy a vehicle outright. As long as you’re making the agreed-upon payments and you’re not struggling too much financially because of it, this kind of debt can actually be beneficial for your credit score and worth it. However, many people find themselves in the situation where playing back their debt is beyond their capabilities. They reach a point that they’re essentially drowning in these financial obligations.

The resulting stress and impact this can have on someone’s life is frightening. Many feel ashamed or foolish, but it’s important to remember that you’re not alone and you’re certainly not the first person to find themselves in this situation. With some work, communication, and seeking help from experts you can overcome this challenge and get back to a place where you’re far more secure financially.

 

 

https://www.uscourts.gov/news/2019/04/22/bankruptcy-filings-continue-decline#:~:text=According%20to%20statistics%20released%20by,declining%20bankruptcy%20filings%20since%202011.
https://www-fool-com.cdn.ampproject.org/v/s/www.fool.com/the-ascent/amp/research/personal-bankruptcy-statistics/?amp_js_v=a6&amp_gsa=1&usqp=mq331AQHKAFQArABIA%3D%3D#aoh=16201763578040&referrer=https%3A%2F%2Fwww.google.com&amp_tf=From%20%251%24s&ampshare=https%3A%2F%2Fwww.fool.com%2Fthe-ascent%2Famp%2Fresearch%2Fpersonal-bankruptcy-statistics%2F%23aoh%3D16201763578040%26referrer%3Dhttps%253A%252F%252Fwww.google.com%26amp_tf%3DFrom%2520%25251%2524s
https://www.investopedia.com/the-side-effects-of-bad-credit-4769783#:~:text=Bad%20Credit%20Means%20Trouble%20Getting%20a%20Loan&text=A%20low%20score%20can%20make,great%20level%20of%20default%20risk.
Published On: May 7th, 2021 / Categories: Powered Financial /

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