Debt Settlement vs. Bankruptcy: A Comparative Analysis

Millions of consumers are crushed under the burden of debt after the recent economic depression in the US. In such situations, people either rely on debt settlement services or they file for bankruptcy as a last resort. These two debt settlement solutions help people to start their financial life afresh. But before you select a debt settlement solution, it is essential to understand the differences between debt settlement and bankruptcy. A comparative analysis can help you make the right decision.

Debt Settlement vs. Bankruptcy: The Basics

The functions of debt settlement and a bankruptcy declaration are very different.

What is Debt Settlement?

Debt settlement is a form of a “financial workout” for consumers. It generally involves a repayment plan where the debtor consolidates his or her payments into small, affordable monthly installments and ultimately pays less than he originally owed to the creditors. Debt settlement companies employ experts in this field who will negotiate with creditors on your behalf and reduce your debts. Unlike bankruptcy, your credit report will indicate favorably that your debt was “settled” or “resolved,” rather than “unpaid.“

What is Bankruptcy?

Bankruptcy is a legal procedure where a petition is filed in the bankruptcy court to discharge your debt entirely. There are two types of bankruptcy methods for individuals: Chapter 7, and Chapter 13.

A Chapter 7 bankruptcy is the most frequent type of bankruptcy filed by consumers. It is a liquidation arrangement, where all debts are wiped out completely. This form of bankruptcy is available to individuals, married couples, those in partnerships and corporations.

A Chapter 13 bankruptcy includes a debt repayment plan available for individuals and married couples who have debts that fall within a specific statutory amount. Chapter 13 allows debtors to repay either some or all of their debts from their projected future income over a 3 to 5 year period

Debt Settlement Services: A Closer Look

Debt settlement services are a simple debt reduction method that will help you achieve financial liberation. To settle your debt, you can hire the services of any number of debt settlement companies, or you can settle your own debt with a “do it yourself” debt settlement plan.

Using a debt settlement company like Legal Helpers Debt Resolution (LHDR)-Help LLC, you can benefit by having an expert negotiate with your creditors on your behalf. They will generally approach the creditors (typically banks) with a larger amount of debt that is created by bundling together the various debts of many clients and using that leverage to ultimately obtain a greater debt reduction for the whole group. For the best results, make sure to find a debt settlement company you trust.

No debt can be settled without the mutual consent of the debtor and creditor. Whenever you fail to pay your full obligation to your creditors, your credit is negatively affected. However, once your individual accounts are settled your creditors are required to report this information to all major credit reporting bureaus. This updates your individual credit report and allows you to start rebuilding your credit right away.

Declaring Chapter 7 Bankruptcy: A Closer Look

debt-settlement-vs-bankruptcy

When you file for Chapter 7 bankruptcy, it stops all collection actions by creditors, including foreclosures, repossessions, and garnishments. If you have filed bankruptcy with an attorney, she or he shields you by handling all inquiries from creditors. However, you will lose all your credit cards and you may have to give up some luxury possessions. You will also need to complete a credit counseling session before filing a petition in the court.

You may be able to discharge your unsecured debt by filing bankruptcy, but the stigma of bankruptcy remains on your credit report for up to 10 years. This makes it extremely difficult to acquire credit, buy a home or car, get life insurance, or even get a job. A recent bankruptcy also makes it nearly impossible to get a mortgage, although it will likely become easier after five years.

The Chapter 7 bankruptcy procedure is usually completed within 6 months, whereas it can take 3-5 years to complete a repayment plan under Chapter 13.

Evaluating Debt Settlement vs. Bankruptcy

When you hire the services of a debt settlement company, your payment plan will incorporate a fee. That fee generally amounts to 15-17% of your total debt. On average, the typical debtor will reduce his debt to 55 cents on the dollar (including the debt settlement company fee).

When you file a bankruptcy petition in court, you are required to pay several hundreds of dollars in filing fees. Your attorney will also charge a consultation fee, which is imposed before any services are rendered.

When it comes down to debt settlement vs. bankruptcy, it’s best to analyze your financial situation carefully in order to choose the course of action that’s best for you and your family. We hope this overview helped you make the right decision!

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