If you struggle with overdue bills and persistent telephone calls from angry creditors, the stress of dealing with debt you cannot afford to pay may lead you to seek relief from either debt settlement or bankruptcy. Although debt settlement and bankruptcy can be beneficial in the right circumstances, it is imperative that you understand the differences between these two debt relief options in order to make the correct financial decision.
Facts
Through debt settlement, you can negotiate the terms of your original agreement with your creditors and attempt to lower your balances. If you file for bankruptcy, the bankruptcy court takes control of your debt situation. If you choose Chapter 7 bankruptcy, the court seizes and liquidates any non-exempt assets, pays off as many creditors as possible with the proceeds and discharging your remaining debt. Should you file for Chapter 13 bankruptcy, you must propose a plan to repay as much of your debt as you can afford within three to five years.
Significance
A debt settlement only provides debt relief for one debt. A bankruptcy petition encompasses all of your outstanding debts. According to the Federal Citizen Information Center, it is crucial that you include all of your debts in your initial bankruptcy petition. Failure to include debts may result in those debts not being discharged. In addition, debt settlement does not absolve you of your obligation to repay your creditors--it merely offers you the chance to modify the amount you owe. A bankruptcy may discharge your legal obligation to repay your debts.
Features
You can negotiate a debt settlement on your own or hire a company or attorney to negotiate on your behalf. When you file for bankruptcy, you may not need to negotiate at all. In a Chapter 7 bankruptcy, the court allocates the proceeds from the sale of your assets to creditors as it sees fit. In Chapter 13, the court evaluates your income and your repayment plan and makes a decision concerning how much of your debt it expects you to repay. Your creditors do not have to approve the court's decision for it to be legally binding.
Effects
Both debt settlement and bankruptcy will damage your credit. According to MSN Money, creditors usually don't negotiate debt settlements with consumers who aren't behind on their payments. The FICO credit scoring formula places a higher importance on your payment history than any other single credit factor. Thus, missing payments just to negotiate a good settlement hurts your credit score. Bankruptcy is one of the most significant negative entries you can have on your credit report. The Fair Credit Reporting Act allows the credit bureaus to report a bankruptcy for 10 years--during which time it can hinder your ability to qualify for new credit, loans, housing and insurance.
Considerations
In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) went into effect. This act amended the U.S. Bankruptcy Code and significantly altered the bankruptcy process for consumers. One of the new provisions of BAPCPA was that all consumers must seek government-approved credit counseling prior to filing for bankruptcy. A government-approved credit counselor can evaluate your debts, income and assets to determine whether bankruptcy is a good option for you or whether debt settlement may be more beneficial in your current financial situation.
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