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Bankruptcy vs. Debt Settlement – Which One Is Right for Me?

On Behalf of | Dec 15, 2022 | Bankruptcy

Bankruptcy and debt settlement can solve the same financial problem. However, determining the most appropriate method to get out of debt can take time and effort. You should understand the differences between the options and consider which can help you reach your goals.

Differences Between Bankruptcy and Debt Settlement

The primary difference between bankruptcy and debt settlement is the court’s involvement. With bankruptcy, you must file documents with the bankruptcy court to request a debt discharge or approval of a repayment plan.

A debt settlement is an arrangement with your creditor to pay back what you owe at a reduced amount. Typically, you provide one lump-sum payment to satisfy your debt. However, some creditors allow a fixed monthly payment over a predetermined timeframe.

Another difference is the tax consequences. You aren’t taxed on your discharged debt when you are granted bankruptcy. However, the amount of debt a creditor forgives is considered taxable income.

The impact on your credit score is slightly less damaging with debt settlement than with bankruptcy. Any type of bankruptcy you choose can affect your score and stay on your credit report for seven to ten years.

Factors You Should Consider When Making a Decision

Choosing between debt settlement and bankruptcy depends on your circumstances. Solving financial problems isn’t a one size fits all approach. You must do what’s best for you and your situation. Some people benefit from filing for bankruptcy to wipe out their debt and start fresh. Others find it easier to get out of debt with an affordable payment plan.

Debt settlement might be better for you if:

  • You have a steady enough income to pay for housing, utilities, and other essentials while making the required monthly payments
  • You’re willing to negotiate a settlement plan you can afford with a creditor or debt collector
  • You can make a lump-sum payment at a lower amount than what you owe without risking your current financial situation

Factors that might make bankruptcy a more attractive option include:

  • You don’t have enough disposable income to make monthly payments or pay one amount upfront
  • Filing for bankruptcy could prevent you from losing your home to foreclosure
  • You exhausted all possible options for wiping out your debt
  • You lost your job
  • Any settlement arrangement to pay what you owe will take longer than five years
  • Making monthly payments requires using money from savings, a 401(k) plan, or another emergency fund
  • You can’t pay back what you owe without applying for a loan

Advantages and Disadvantages of Bankruptcy

Whether you have personal or business debt, filing for bankruptcy might benefit you. Like any other debt relief option, there are pros and cons.

The advantages of bankruptcy include:

  • Discharge qualifying debt to wipe the financial slate clean by filing for Chapter 7
  • Chapter 13 discharges debt after completing the required payments
  • Pay off debt by making monthly payments over multiple years
  • Filing immediately triggers an automatic stay, prohibiting creditors from collections efforts

The disadvantages of bankruptcy include:

  • Negative impact on a credit report and credit score for up to ten years, depending on the type of bankruptcy filed
  • Must liquidate assets to satisfy debt with Chapter 7
  • Bankruptcy doesn’t relieve child support or alimony obligations
  • Court approval is required for activities beyond normal business operations after filing for Chapter 11

Advantages and Disadvantages of Debt Settlement

Negotiating a settlement with your creditors might be the best option for fixing your financial mess. However, it has its drawbacks.

The advantages of a debt settlement include:

  • Settle the debt by paying only a portion of the amount owed
  • Repay the creditor sooner than other options
  • Avoid the account going to collections
  • Less severe immediate impact on credit

Settling debt also has some disadvantages, such as:

  • Missing a payment triggers late fees and interest
  • Must pay taxes on the forgiven amount of debt
  • Not all creditors are willing to negotiate
  • Expensive fee charged by the debt settlement company

Contact a Skilled Council Bluffs Bankruptcy Attorney Today

Debt is a problem many people face. It can be overwhelming trying to get out of it. Before deciding between bankruptcy or debt settlement, consult Telpner Peterson Law Firm, LLP.

If you’re in debt and want to determine whether bankruptcy is right for you, call 712-309-3738 or contact us online today for a consultation.