How to Compare Debt Settlement vs. Bankruptcy

Financial difficulties are understandably stressful, especially during a poor economic climate. When unemployment numbers and foreclosure rates are high, it's easy to get behind in paying your debts and you may start looking for a way out. Debt settlement and bankruptcy both have advantages and disadvantages; the key is figuring out if either option is right for you. Knowing how to compare debt settlement vs. bankruptcy can help you decide.


  1. Image titled Compare Debt Settlement vs. Bankruptcy Step 1
    Order a copy of your credit report to get an accurate picture of your level of debt. You need to check credit reports from all of the credit reporting agencies, as your creditors may not file with all three. Check for inaccuracies, too, to make sure you aren't trying to settle debts you don't actually have. You're usually allowed one free report once per year.
  2. Image titled Compare Debt Settlement vs. Bankruptcy Step 2
    Make two lists, one of all your debts and the monthly payments needed to satisfy those debts and another of all your net income sources.
    • Depending on the laws in your state, you may not need to include the mortgage for your main residence and car notes on one car for you and your spouse, as these may be protected by state law. However, for the purpose of determining your monthly debt and monthly income, you'll need to include all your payments including utilities.
    • Debt settlement (or debt management) might be the best option if you have more income than you have debt each month. A settlement plan will require a lump sum payment made to the debt settlement company for them to make payments to your creditors.
    • Bankruptcy may be your best option if you have more debt than you have monthly income. The actual amount of debt and your financial situation will help you determine whether you qualify for Chapter 7 or Chapter 13 bankruptcy. If you have only been paying minimums due each month and you've had a major financial setback like a divorce, major illness or job loss, your best bet might be Chapter 7, which wipes out all debt. (Check your household income to see if it is below your state's allowable income level to qualify for Chapter 7.) If you have assets the court can sell or you have enough remaining each month to be able to make payments, you might qualify for Chapter 13, which allows you to pay back debt over a few years.
  3. Image titled Compare Debt Settlement vs. Bankruptcy Step 3
    Understand how debt settlement or bankruptcy will affect your credit score and your future buying power.
    • Debt settlement will reduce your credit score by a minimum of 50 points, more if you've skipped payments or been late to pay. Many creditors also view debt settlement in a similar light to bankruptcy, making it just as damaging to your credit rating.
    • Bankruptcy will immediately cut your credit score by a minimum of 200 points and stay on your credit report for 7 to 10 years. Depending on the financial climate, this could greatly diminish your ability to qualify for a house, car or credit cards for many years.
  4. Image titled Compare Debt Settlement vs. Bankruptcy Step 4
    Determine your actual costs of entering into each option.
    • With debt settlement, you'll pay a lump sum payment to start your plan in addition to continuing with your monthly minimum payments until the settlement plan kicks in.
    • A bankruptcy attorney will require you to pay the retainer, court costs and filing fees before filing your bankruptcy. Once you've paid the retainer, though, your attorney will probably instruct you to stop making payments on unsecured debt and have you read a script to your creditors when they call. Payments will resume, if you're approved for Chapter 13, once the case is discharged.


  • Considering you're at the point of comparing debt management and bankruptcy, your credit score is probably already suffering. Remember that you can always rebuild your credit after completing a debt settlement plan or bankruptcy, as long as you change your spending habits.
  • Bankruptcy won't wipe out all debt. You'll still be responsible for child support and alimony, most student loans, most back taxes, large luxury purchases and cash advances within 90 days of filing, fraudulent debts and government fines and penalties.

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Categories: Bankruptcy