Best Price Comparison Sites
     



Difference between debt settlement and bankruptcy – A closer look

If you are in debt there are many debt relief options that can help you get out of your debt woes. These options depend upon the situation of your debt. If your debts are fairly in a condition that they can be handled with just some mild measures then credit counselling, debt consolidation or debt management can be your option. Such debt relief methods are useful to you if you are having difficulties in paying more than the minimum balance on your debts. However, if you are in a worse situation and can hardly make your minimum payments and have even missed one or two, you need a more aggressive approach such as debt settlement programs to help you get out of debt.

Debt settlement process basically reduces your entire debt amount unlike consolidation or debt management where only your interest rate on the outstanding debt is reduced. There is another process that people often think is similar to debt settlement is bankruptcy. However, this is not true. Bankruptcy as a process is much more aggressive than debt settlement and is the last alternative of doing away with your debts. Some basic differences between debt settlement and bankruptcy are discussed below.

1. Debt settlement as an option is best for you if you have more amount of income than you have debt every month. You will have to pay a lump sum amount to the settlement company to settle your debts with your creditors. On the other hand, your best option would be bankruptcy if you have more amounts of debts as compared to your monthly income. There are two kinds of bankruptcies, Chapter 7 and Chapter 13 and your financial situation along with the amount of debt you have will determine which kind of bankruptcy is suitable for you. Chapter 7 bankruptcy wipes out all your debts while Chapter 13 draws out a repayment plan for you and allows you to pay back your debts over a few years by selling your assets and saving from your monthly income.

2. The second major difference between the two processes is how they affect your credit score. Debt settlement usually reduces your score by a minimum of 50 points and more if you have added drawbacks such as late payments or missed payments. Bankruptcy, on the other hand can be devastating to your credit score. It reduces your credit score by a minimum of 200 points and persists on your credit report for 7 years to 10 years. This will make it very difficult for you to take out a new loan, whether secured or unsecured.

Thus you can see the two major differences that sets debt settlement and bankruptcy apart from each other.