Excessive debt can take its toll on your mental and physical health. If you have a lot of debt you may find yourself considering one of two options: debt settlement or bankruptcy. Choosing between these two options is a process that should be done with care, as your decision could have a long-term impact on your ability to secure credit. Below is a look at debt settlement vs. bankruptcy and the factors you should consider when choosing the best option for your situation.
What are the two main types of bankruptcy?
When deciding between bankruptcy and debt settlement, it is helpful to understand that there are different types of personal bankruptcy. The two most common types are Chapter 7 and Chapter 13. Here are some of the key features of each type:
- Chapter 7: Also known as a liquidation bankruptcy, Chapter 7 involves selling your property to repay your debts. There are income limits associated with Chapter 7 bankruptcy, as it is designed for people with low to modest incomes who are unable to repay their debts.
- Chapter 13: Commonly called a reorganization bankruptcy, this type of bankruptcy takes the form of a payment plan in which you take three to five years to pay off your debts. Your property is typically not sold and you might be able to keep your property if you comply with the repayment play mandated by the court.
How does debt settlement differ from bankruptcy?
Debt settlement is a process in which you negotiate with your creditors to agree to pay an amount that is less than the total amount you owe. In order to explore debt settlement, you need to have an income stream that will enable you to repay your creditors the amount of money you have agreed upon in your negotiations.
If your creditors agree to settle your debts, they will not continue to push you to pay the total amount you owed. Debt settlement also helps to eliminate worries that creditors could sue you for failure to pay your debts.
How does each option impact your credit report?
Bankruptcy is typically the most damaging to your credit report. You can expect a Chapter 13 bankruptcy to appear on your credit report for seven years from the date of your filing. A Chapter 7 or Chapter 11 bankruptcy will remain on your credit report for 10 years from the date of your filing. The accounts linked to your bankruptcy also remain on your account, though they remain for seven years from the initial delinquency date.
Debt settlement is not quite as damaging to your credit report. When you work with a creditor to settle a debt, the payment status for that account will change from “Unpaid” to “Settled” or “Paid Settled.” While a “Settled” or “Paid Settled” status represents an improvement from an “Unpaid” status, lenders may refrain from extending credit because there is not a “Paid in full” or “Paid as agreed” status on your report.
Is a lawyer required for bankruptcy or debt settlement?
While an attorney is not required for all bankruptcy cases, it is highly recommended – especially for more complex cases that involve multiple properties and sizable amounts of money. Even if you have little property or your income is below average, your chances of a successful bankruptcy filing are much greater when an experienced attorney is handling the bankruptcy process.
Debt settlement can usually be handled without an attorney because a court filing is not required. While you can enlist the help of an attorney if you wish, you can work directly with your creditors or work through a third party debt settlement agency to negotiate with your creditors.
Which option offers the fastest way to get out of debt?
Bankruptcy can help you resolve your debts faster. However, it is important to remember that bankruptcy will remain on your credit report for up to 10 years. This will likely impact your ability to secure credit.
The debt settlement process takes significantly longer on the front end, often averaging between 6 and 24 months. This includes the time taken to negotiate the settlement and time required to pay off the debts. The settlement process can take even longer if you work with a firm that will agree to extend the process. While there are also isolated instances in which you can reach a settlement with creditors in a few weeks, this is not common – especially if multiple creditors are involved.
Summarizing the key differences between debt settlement and bankruptcy
Debt settlement and bankruptcy offer two different paths that you can take to address your debts and turn over a new financial leaf. However, it is important to remember some key points about about bankruptcy and debt settlement. They are as follows:
- Both processes can negatively affect your credit report, though bankruptcy has a more severe impact
- The bankruptcy process typically addresses debts faster than debt settlement
- While an attorney may not be required in every bankruptcy case, it is strongly recommended for a successful filing
- Debt settlement and Chapter 13 bankruptcy require the financial ability to repay at least a portion of your debt owed
What is the best way to decide between debt settlement vs. bankruptcy?
Determining how to handle your debts is not an easy decision. It is important to evaluate each option carefully to ensure that you choose the best option. The surest way to achieve this goal is to seek the guidance of a legal expert who knows the pros and cons of debt settlement and bankruptcy. By seeking the services of an experienced Tampa bankruptcy attorney, you can help ensure that you consider every angle during the decision making process.
Florida Law Advisers, P.A. has answered thousands of questions about debt settlement and bankruptcy. As Florida’s most responsive team of bankruptcy lawyers, we have the expertise to guide you through the bankruptcy process and further explain the differences between bankruptcy and debt settlement. We invite you to contact us to discover how we can help you embark on the path to resolving your debts.