Debt Settlement vs. Bankruptcy

Debt settlement can be an option to bankruptcy if you have at least some means available to pay off your debts. Even if you eventually file for bankruptcy, this is often a good first step for debtors in addressing financial difficulties, as it shows you have a strong interest in working with your creditors on repaying what you owe.

What is debt settlement?

During debt settlement, you, an attorney, or even a credit agency can contact your creditors and try to negotiate a lower total debt. In addition, you may be able to work out a repayment plan that works for both you and your creditors. Unsecured creditors, e.g., credit card companies, often prefer to work on debt settlement plans because in this way, they have a better chance of seeing at least some of their money paid back than if the case goes through bankruptcy.

How will debt settlement affect my credit?

Debt settlement efforts often do show up on credit reports, which means it can adversely affect your credit score; if you are considering debt settlement, though, you could also try to negotiate this aspect with creditors as they may agree to leave this information off of your credit report.

Remember, though, that bankruptcy can show up on your credit report for ten years or even more, so either way, you will likely have some credit report ramifications.

What happens if I default on a debt settlement plan?

A debt settlement plan is essentially a contract between you and the creditor; if you fail to meet your obligations, the creditor may sue you for repayment.

Are there tax consequences to debt settlement?

Maybe. Canceled debt may be considered income on which you’d have to pay taxes. Because this is such a complicated area of the law, you are advised to contact an experienced bankruptcy attorney in your area for advice on your specific situation.