How to Compare Debt Settlement and Bankruptcy

Comparing bankruptcy and debt settlement is easy. They are both very different options with the same goal in mind, helping you get debt free.


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    Consider all the other options, and use bankruptcy as the last resort.]]Check whether you will have to pay taxes on the amount your creditors forgive with debt settlement. Perhaps, with court ordered amounts in Chapter 7, you will have to report the amount forgiven, but you may not have the tax liability.
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    Consider whether you want to go to court. Bankruptcy Chapter 7 and 13 are in-court proceedings, while debt settlement is handled out of court.
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    Count your assets. You can expect to lose some of your assets with Chapter 7 bankruptcy -- while you may be able to keep all of your assets with debt settlement.
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    Realize that neither bankruptcy nor debt settlement will normally get rid of secured debt, court ordered debt like alimony or child support, or student loans. Such debts are called not "dischargeable."
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    Determine if you'll need help: Both bankruptcy and debt settlement can be done on your own or with assistance. If you're having trouble understanding how to settle your debts or proceed in court, then getting help is always a good idea.
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    Consider the other debt solution options: Debt management and debt consolidation loans are also options that will help you avoid bankruptcy.
    • You may do less damage to your credit scores with a debt settlement than you would with bankruptcy.
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    Avoid filing for bankruptcy except as a last resort. Typically it's better to try a debt solution program before filing for bankruptcy. You pay less than the original amount you owed with debt settlement and Chapter 7.


  • Be honest with yourself and your family about your financial situation.
  • If an individual or a corporation declares bankruptcy, a court will appoint an official to:
    • Make an inventory of the individual's or corporation's assets and to
    • Establish a schedule by which creditors can be partially repaid what is owed to them.[1]
  • Bankruptcy protects you, the debtor, from debt collection by your creditors:[2]
    • Voluntary bankruptcy is when a debtor files for bankruptcy.
    • Involuntary bankruptcy is when a creditor petitions the court to declare the debtor bankrupt. Involuntary bankruptcy is allowed only under chapter 7 or chapter 11 of the U.S. Bankruptcy Code.
    • There are four types of relief available to individuals or corporations under the U.S. Bankruptcy Code:
      • Liquidation (chapter 7),
      • Reorganization (chapter 11),
      • Debt adjustment for the family farmer" (chapter 12), and
      • Debt adjustment for an individual with a regular income" (chapter 13).
    • The courts determine which debts are repaid according to their "priority" (in a certain order), and you, the debtor, are typically granted a "discharge" from the unpaid debts that are "dischargeable" under the Bankruptcy Code.


  • Prepare for it taking up to 10 years for your credit score to be restored: It will depend on your court jurisdiction, the amount of debt and the bankruptcy chapter you file under.
  • Both debt settlement and bankruptcy may cause your credit scores to decrease.

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Categories: Bankruptcy