When you’re trying to decide whether you should go through with debt settlement or file bankruptcy, one big factor should play into your decision. That is the number of debts you have.
People have different debt situations and different tolerance for side-effects in dealing with debt. People considering debt settlement often also consider bankruptcy and vise versa and often choose one over the other because of the result they’re seeking.
Debt Settlement for Fewer Accounts
If you only have just one or two bad debts you need help with, debt settlement might be a better solution and here’s why. Bankruptcy has long-lasting consequences. It stays on your credit report up to ten years. It’s on public record forever. Creditors, lenders, and employers may ask if you’ve ever filed bankruptcy and you could be guilty of fraud if you say you haven’t filed bankruptcy when you actually have. You don’t face the same consequences when you settle a debt.
Debt settlement stays on your credit report for up to seven years. A specific creditor may have a record of your debt settlement beyond the credit reporting time limit, but it’s not likely since creditors often remove old accounts from their system periodically. Really, after the seven years, no one really knows that you settled a debt, unless you tell them.
Since debt settlement’s consequences are less severe than bankruptcy, it’s often a preferable solution, especially when you’re dealing with very few debts. You do have to be careful that you’re not settling just one account while keeping up the payments on all your other accounts. Creditors and collectors may be suspicious about why you can remain current on other accounts, but can’t afford to pay their account in full. And they could know you’re doing this because they can check your credit report.
When Is Bankruptcy Better?
When you have lots of debts, bankruptcy may be a better solution, especially if some of your accounts are secured debts for assets that you want to keep. For example, if you’re behind on your mortgage and several credit cards, you could file bankruptcy to restructure all your payments including the past due mortgage balance. You get to avoid foreclosure and keep your home. You could do something similar with an auto loan if you want to avoid repossession.
It could be harder and more time-consuming to settle several different accounts. There’s a chance that some creditors won’t agree to a settlement. For those debts, you’ll have to figure out another solution which could mean paying in full. Settling multiple accounts with high balances could take several years. You could have these accounts discharged in bankruptcy in several months if you qualify for Chapter 7 bankruptcy. You’d be able to start over much faster if it takes you four to five years to completely settle all your debt. Of course, you also have to deal with any consequences of settling your debt.
Finally, if you can’t save up the money to settle several debts, bankruptcy might be a better solution, even if it’s Chapter 13 bankruptcy. Weigh your options carefully; the solution you choose should be one that you can live with.