Debt Settlement vs Bankruptcy Compared

When you are in trouble financially, you may find yourself looking at debt settlement or bankruptcy. Depending on how bad your situation is, both possibilities have some merit. Both options will potentially help you handle your debt problem, but hurt your credit. However, they have properties that make them unique and effective in the right situation. If you are considering between debt settlement and bankruptcy, here are a few things to consider. 

Debt Settlement

When you undergo a debt settlement, you are working with your creditors on an individual basis. You can have an agent represent you or you can take on the project by yourself. Regardless of who is representing you, debt settlement involves a negotiation process with those that you owe money, asking them to take less than they owe. If the debt is late and you have not been making your payments, they may be happy just to get something from you. When they agree to go through with a debt settlement, it is usually because you are offering them a cash payment. 

In most cases, the cash payment is made as one large lump sum. In order to get a discount on the debt, this is what most companies are going to require. 

Going through with a debt settlement is going to negatively impact your credit. However, it will not affect your credit as drastically as a bankruptcy would. This makes it the lesser or two evils if you want to keep your credit score in tact to a certain degree. 

In addition to hurting your credit, you will usually have to pay taxes on the amount of money that the company writes off. If you owe someone $10,000 and they take $6000 to close your account, you will have to pay taxes on $4000. Therefore, the free money that you thought you got is not actually free.


With bankruptcy, you are basically starting over. You can get your debts discharged through bankruptcy and not have to worry about repaying them in many cases. This is the key area where it differs from debt settlement. You do not have to come up with a lump sum of cash to pay off a creditor like you do with debt settlement.

With bankruptcy, you are going to have to go through the courts and get your case approved. Debt settlement is something that you can do on your own if you desire. You have to make sure that you do the bankruptcy process correctly, as the judge could potentially dismiss the case. You have to fill out all of the proper forms at the right time if you want to successfully get a bankruptcy. It is usually best to get the help of a lawyer in this situation. If you choose not to, make sure that you understand how the process works. 

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