Comparison between Debt Settlement program and Bankruptcy

Choosing between debt settlement and bankruptcy in the face of mounting debts is a tough decision to make. It is important to understand that although both the options aim at offering debt relief, they work very differently. So, in order to make an informed decision, you need to understand these options in detail.


Settlement is a debt reduction program where the creditor accepts a reduced amount from the debtor, which is regarded as payment in full. Effective negotiation can lower your debt to 40-60% percent of your total debt. On successful completion of debt settlement, the creditor will report your account to the Credit Bureau as "settled" or "paid".

Bankruptcy is a court based procedure, which is initiated by the debtor. Consumers are permitted to file personal bankruptcy under Chapter 7 or Chapter 13 of Title 11 of the Federal Bankruptcy Code.

During Chapter 7 Bankruptcy, the court sells off your non-exempt assets and uses the proceeds to pay your creditors. Remaining debts are discharged by the court and you are declared debt-free.

Chapter 13 bankruptcy is a reorganization of your existing liabilities. The court appointed trustee sets up a repayment plan to help you pay off your debts comfortably within 3-5 years.

On the completion of bankruptcy, you are relieved of all debts and allowed to rebuild your finances. However, bankruptcy procedures are usually more complicated in comparison to debt settlement.

Effect on your credit score

Your credit score is a matter for real concern in any kind of debt relief. Therefore, is important to understand how bankruptcy and debt settlement impact your credit report.

Bankruptcy can hurt your credit score by 200-250 points. The total extent of the damage depends on the nature of the other negative remarks you have on your credit report. Bankruptcy remains on your credit report for 7-10 years, which will prevent you from getting credit in the future.

Debt settlement will lower your credit score at first, but as you keep making payments on time, your credit score increases.

Which option is preferable?

Debt settlement is preferable to bankruptcy if you are able to pay off a part of your debt. You should explore all possible debt relief options before you file for bankruptcy.

Debt settlement gives you the following benefits:

  • You pay less and get rid of your debts completely.
  • You are relieved of your debts much faster.
  • You avoid losing your home and car.
  • Debt settlement does not damage your credit score as badly as bankruptcy does.
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