Debt Settlement vs Bankruptcy
The Pros and Cons

If you're up to your eyeballs in debt, you may be trying to weigh the debt settlement vs bankruptcy equation in your mind. In the short term, the balance may seem fairly even. To get the big picture requires a closer look.

Debt settlement can mean having to sell off assets to produce the cash necessary to keep your creditors happy. While personal bankruptcy, at least at first glance, can appear to be an appealing way to clear the slate and start over again. In the reality of the financial world things are a little more complicated.

Generally speaking, in the long run, the majority of credit consumers will be far better off settling a debt, whenever possible, rather than declaring bankruptcy.

In a nutshell, here is what is involved in debt settlement:

• After some negotiation you end up settling a debt for less than the full amount you owe.
• The settlement will be recorded on your credit history and your credit score will take a big hit.
• Should you choose to use a debt settlement company, they may require you to have a minimum amount of unsecured debt before they will take up your case.

Compare this to what happens when you declare bankruptcy:

• The bankruptcy is recorded on you credit record and stays on your credit report for ten years.
• Will generally make it very difficult to impossible for you to borrow money from major institutions such as banks.
• Wipes out most of the unsecured bills you owe—however, there are several exceptions, including student loans and most secured debt.
• Depending on which chapter of the bankruptcy code you file under, you may be forced to sell certain assets, unless they are under exemption.

As you can see there are obvious advantages to debt settlement, in most situations, over declaring bankruptcy. But as always the debt settlement vs bankruptcy debate is not always that black and white. How do you determine which option, debt settlement or bankruptcy, is best suited to your situation?

Know Your Credit Score

If you haven't already done so, start by pulling your free credit reports from the three major credit reporting bureaus. This will help you get a clear picture of where you stand financially, how bad things actually are, and how much you have to lose with each debt reduction option.

For instance, if you discover your credit score is already poor, you have less to lose by declaring bankruptcy than if your score still remains relatively high and as yet undamaged by your debt problems. In this case, taking a debt settlement and working hard to repair your credit score afterwards is probably the better option.

Cash is King for Debt Settlement

A close examination of your total debt burden may reveal a more ominous story where things are so tight that you simply don’t have the ability to raise the cash needed to settle your debts via a settlement. Think of it this way: if you can sell enough assets to acquire the cash to settle your major debts, and then have the necessary cash flow to pay off the rest over an extended time, you should go down this road.

However, if you were to sell everything you own to settle your debts and you would still be in a position where you were unable to meet monthly payments—in other words, your cash from assets can’t possibly cover bills and expenses—you have little choice but to declare bankruptcy.

Investigate Bankruptcy

The issues of debt settlement vs bankruptcy extends beyond these arguments, as there are in fact different types of bankruptcy. The chapter under which you are eligible to file for bankruptcy will be different depending on your income, total debts, and in some cases your occupation.

For instance, a Chapter 7 bankruptcy filing requires the forced sale of assets that aren’t under exemption, whereas Chapter 11 bankruptcy may allow the filer some opportunities to get back on their feet by restructuring their debt. Not all bankruptcies are created equal.