The debt settlement vs bankruptcy decision process is important for those who need to get rid of debt. Declaring personal bankruptcy is the best known debt free plan, but shouldn’t be entered by everyone who is experiencing financial difficulties. It is a way of tackling serious debt problems as there are more effective ways of dealing with smaller debts. Although most unsecured debts can be eliminated, this isn’t the case with student loans, alimony, child support and federal income taxes. These debts can be legally restructured as part of a bankruptcy agreement, but not as part of a debt settlement program.
Debt Settlement vs Bankruptcy to Get Out of Debt Most Quickly
- Declaring personal bankruptcy enables the filer to get rid of debt in just 4 to 6 months. It won’t normally be necessary to offer creditors a monthly contribution. The agreement is legally binding so the debtor receives full court protection from creditors.
- Debt settlement negotiation allows that person to get out of debt in 12, 24 or 36 months. An intermediary seeks to achieve a debt reduction of up to 50% and the balance will be repaid over a pre-specified term. It is a purely voluntary agreement.
Debt Settlement Negotiation Requires a Monthly Creditor Payment
Receiving help from a debt settlement company won’t always be possible. Unlike filing for bankruptcy under chapter 7, it is necessary to make a monthly payment to creditors. Should that person have experienced a change of personal circumstances, such as ill health or unemployment, there may not be sufficient disposable income left over to achieve this objective. Even if this isn’t the case, a lot can happen over the next few years which may mean that person has to file bankruptcy anyway.
Declaring Personal Bankruptcy Isn’t Always Possible
Although filing chapter 7 bankruptcy enables that person to get out of debt faster, not everyone will be eligible. The laws were reformed in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act to prevent what was perceived as widespread abuse. The main changes are as follows:
- It is not possible to file under chapter 7 if that person has already done so in the previous 8 years. This doesn’t rule out the possibility of filing chapter 13 bankruptcy.
- The average income for the last 6 months must be below the state median. A bankruptcy attorney may be able to legally reduce the filer’s income.
- Any non-exempt assets, such as a second home or sports car, will need to be given to a court-appointed trustee in order that they can be sold. This can be avoided with debt settlement negotiation.
Debt Settlement vs Bankruptcy: Effect on Personal Credit Score
Filing chapter 7 bankruptcy will show on a personal credit score for a period of 10-years. Liz Pulliam-Weston of MSN Money said that it will lead to a 680 credit score falling by between 130 and 150 points. Debt settlement negotiation and chapter 13 don’t lead to the same level of credit score drop, but will still be visible to creditors for the next 7-years. There are steps that can be taken to get a better credit score, but it will take 2 to 3 years of punctual repayments on existing debts before lower interest deals will become available.