Today’s world demands a lot of your finances and if you’re like most, keeping up with the demand can be difficult. When your finances and debt become overwhelming, there are a few options available to help get your financial life back on track. Relieving your debt with choices like bankruptcy and debt settlement are big, life decisions, so education is key. Before you take the big leap, here’s everything you need to know about both choices to help you make the best choice when considering debt settlement vs. bankruptcy.
The Basics
Both debt settlement and bankruptcy offer you options for managing and eliminating personal debt. Whether it’s medical bills, student loans, credit cards, or something else, one option provides you with immediate relief, but also immediate disadvantages. The other option provides you with long-term results, with long-term solutions. Before comparing debt settlement vs. bankruptcy, it’s important to understand what both debt settlement and bankruptcy entail, who it typically works best for, and what it could mean for your finances. Fully understanding all your options can help you make an informed decision on managing your debt.
Debt Settlement
The debt settlement process is mostly used by those with significant amounts of unsecured debt. Most often caused by credit cards and other small loans, you may have late or delinquent accounts, as well as accounts put into collections. When you opt for the debt settlement process, a company that is specially trained in this area helps negotiate an agreement with your lenders to accept an amount which is less than what is owed to them. In return for a lower payment, it is paid in one, lump sum, instead of small, monthly payments. After all, most creditors would rather receive some money than none at all.
You will work with your debt settlement firm by making small monthly payments, which go towards your personal, debt settlement account. Instead of paying your creditors every month, your debt settlement representative will use your monthly payments to build your account. This account is used to settle the debts with your creditors, as your representative works to negotiate the best settlement offers possible. Keep in mind that these negotiations often do not happen quickly and can take months or even years. The pay-off, however, typically results in a significant reduction in the amount of debt you pay back to your creditors.
Here are some of the most common types of debt that debt settlement programs can help with:
- Personal loans
- Credit cards
- Cell phone and utility bills
- Apartment leases and some mortgage balances
- Private student loans
- Medical bills
Bankruptcy
The bankruptcy process for personal debt involves a long, legal process. It is often used to clear significant amounts of debt but can have long-lasting effects on your credit score. Though there are many forms of bankruptcy, there are two which assist with personal debt.
Chapter 7 bankruptcy is the most commonly used type of bankruptcy for people seeking to eliminate any and all types of debt. It is often used when unexpected changes in your life occur, like unemployment or divorce. Under Chapter 7, you must hire a lawyer to handle all legal factors in Federal bankruptcy court. Depending on the amount of debt you have, as well as assets you own, your lawyer “sells” your non-exempt assets to pay off as much debt as possible. Also known as “straight bankruptcy,” your debt and also your credit is completely cleared.
Chapter 13 bankruptcy is designed for those with a regular income and is often referred to as a “wage earner’s plan.” A legal team assists you with creating a plan that repays your debt. These plans are approved by the court system and span between 3 and 5 years, typically involving large installments that must be made during this time. It can be used for most types of debts and generally allows you to keep large assets like your home, but requires large payments as well as the financial cost of a legal team.
Debt Settlement Vs. Bankruptcy: The Advantages and Differences
After learning more about debt settlement and bankruptcy, how do you know which is the best option for you? Here’s a look at the biggest differences in comparing debt settlement vs. bankruptcy, to help you take advantage of the best benefits available to you:
- Though debt settlement can affect your credit for up to 7 years, bankruptcy can affect it for up to 10. In addition, debt settlement does not have the same affect on your score. Your credit score may be affected by delinquencies and interest associated with debt settlement, but bankruptcy leaves you essentially credit-less for up to a decade.
- Debt settlement firms provide you with representatives that completely take over on your behalf. You simply continue to make payments and your team uses that money to work for you by negotiating with lenders. Bankruptcies must be filed in Federal bankruptcy court, involving lots of paperwork, documents, lawyers, and legal fees; often associated with a long, stressful process.
- Unlike debt settlement and relief services, you must pay to file bankruptcy, often averaging thousands of dollars. This up-front payment must be paid in order to file bankruptcy. Debt settlement allows you to make monthly payments, which is often easier on your budget and financial capabilities.
- Bankruptcies can make your debt go away but can result in the loss of property and assets like your home, car, and more. Debt settlement does not force you to start from scratch and allows you to keep living your life as normal, with all of your assets intact.
- With both types of bankruptcies, you must have a substantial amount of money up-front to pay for court and lawyer fees and/or save up to make the substantial installments. With debt settlement plans, you make one payment every month that fits into your budget. Instead of trying to make several payments to creditors each month, you only make one to settle your debts.
Debt can feel overwhelming, especially with other, everyday life stresses. But finding a path to financial freedom can help you begin a new, less stressful life, debt free. DebtBlue specializes in finding you the ideal path to your own financial freedom. To find out more information about how DebtBlue can help you, contact us today!