The following is a guest blog post by Jason of Debt Consolidation Care Community about Settlement and Bankruptcy, a topic many of our clients ask us about.

Which option is better – Bankruptcy or debt settlement

If rising debt is giving you sleepless nights and you do not know what to do, then you should consider various debt solutions to give you relief from debt. If making minimum payments is also becoming very difficult for you and you have reached a stage in which you can not manage to pay at all, then two debt solutions are worth considering. They are debt settlement and bankruptcy. You must choose very carefully an option that is most suitable to you.

Debt settlement is a process in which, the creditor agrees on a reduced amount of balance that ranges from 40% to 60% of the outstanding debt. This amount is to be paid all at once by you. You can settle the debt yourself or take help from debt settlement companies. You are to pay a fixed monthly amount to the debt settlement company. They negotiate with your creditors to settle your debt to a lower amount. Your monthly installments are accumulated and paid off to your creditors. Thus, you pay lesser than what you were actually supposed to pay.

Bankruptcy is when most of your debts (usually unsecured) are discharged without any obligation on your part to make any further payments. There are two types of bankruptcies- Chapter 7 bankruptcy and chapter 13 bankruptcy. Chapter 7 bankruptcy usually eliminates debts such as medical bills, credit card bills, personal loans, etc. it allows you to get rid of your debt and also lets you keep all your property.

Thus, both options are there to help you get out of debt but which one suits you better depends entirely on your financial situation. Incase of debt settlement you require a lump some amount to pay to creditors that some may not be able to afford. In those cases bankruptcy is a better solution. Chapter 7 bankruptcy is good for people who have lots of debts and very little or no income. You must calculate and see how much you are left with after subtracting your basic expenditure from your income. If you are left with some amount, then you can think about settlement, else you should consider filling for bankruptcy.

A major factor that comes into play when you have to decide between debt settlement and bankruptcy is the effect on credit report. Debt settlement affects your credit score as you do not pay your creditors till you are able to accumulate a considerable amount. In case you have settled your debt your creditors report to the bureaus your debt as ‘settled’. This may cause a negative impact on your credit report. However, bankruptcy affects your credit score much more negatively. Moreover bankruptcy will appear on your credit report for 7 to 10 years, depending on which chapter you file.