What is the Difference Between a Debt Settlement and Bankruptcy?

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When you are dealing with a ton of debt and see no way of getting out from under it, you may consider ways to escape this crushing burden. Two options are available to most people. You can agree to a debt settlement or you can decide to file for bankruptcy. A Bergen County Chapter 13 bankruptcy lawyer can tell you more about which one of these might be a better choice for you.

How Does a Debt Settlement Differ From a Bankruptcy?

A bankruptcy clears your debt in one of two ways. In Chapter 7, you can liquidate assets, pay off creditors, and discharge any eligible debts. Chapter 13 requires that you create a payment plan that is acceptable to your creditors and then make payments for three to five years to get your debt discharged.

A debt settlement requires you to negotiate with creditors and agree to pay a certain portion of your debt. You will end up paying around 25% to 80% of what you owe, along with a fee to the company that helps you reach a debt settlement. You also have to pay taxes on the portion of debt that you did not have to pay.

When Should I Consider a Debt Settlement?

A debt settlement can be a good idea when:

  • You can reach a settlement and payment plan that is affordable to you
  • Your creditors are agreeing to reduce what you need to pay by a significant amount
  • You have enough income to address other costs, like your mortgage or rent, while paying your creditors

When Should I Consider Filing for Bankruptcy?

You should consider filing for bankruptcy when:

  • You don’t want to use retirement savings to pay your debts
  • You are at risk of losing your home
  • You would have to get a high-interest loan to pay your debt
  • You have no income

The bankruptcy process can protect certain assets, like retirement accounts, and there are exemptions made for certain types of property. It’s a good idea to talk to a lawyer so that you could learn more about how a debt settlement or bankruptcy could affect your finances.

How Can a Debt Settlement or Bankruptcy Affect My Credit?

Both of these options will hurt your credit score, but credit can be rebuilt. A debt settlement will often cause a drop of around 75-100 points in your credit score and it will appear on your record for around seven years. A bankruptcy can also reduce your credit score significantly and it can stay on your report for seven to 10 years.

Schedule a Consultation

If you need a fresh financial start, we may be able to help. Contact the Law Office of Boyd & Squitieri today and ask about bankruptcy and your other options. We can help you figure out the best path forward.