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Debt Settlement vs Bankruptcy

February 5th, 2009 by Kenneth Long

If you are drowning in debt, then you might be struggling with determining whether you should seek debt settlement or bankruptcy. There are some general rules of thumb that you may wish to consider.

I Have Lots of Unsecured Debt

If you owe substantial sums of money to several creditors, then you should understand that debt settlement is probably the least favorable option. In most cases, you simply cannot satisfy all of your creditors before they pursue a judgment. This is true whether you attempt to settle your own debts or hire an expensive debt settlement company. Either way, there is no protection from a judgment.

That being said, you might need to find out how bankruptcy works and whether you qualify. If your budget is already well in the negative and you cannot even afford to make any of your debt payments, then you might need to speak with a qualified bankruptcy attorney. This could be especially true if the total of your unsecured loans and credit card balances exceeds 150% of your annual household income.

If you can afford to pay some, but cannot pay the full minimum payments, then you might actually have another alternative. Debt management could be a way to make everyone happy while getting your credit rating back on track at the same time.

I Have Some Unsecured Debt

Having smaller amounts of unsecured debt makes bankruptcy a less appealing option. It is designed for insolvency and desperation, not for a less burdomsome debt problem.

If your debts are all charged off, then debt settlement is actually a reasonable option as long as you avoid debt settlement companies. Settling your own debt could allow you to close the account and avoid legal problems down the road. That being said, understand that you could incur an additional tax liability for any forgiven debt. If any account is settled for a savings of $600 or more, then you should expect to receive Form 1099-C which is automatically reported to the Internal Revenue Service.

Debtors that still owe original creditors may find that credit counseling might be a better option. There may be benefits available that could provide a lower monthly payment and reduced interest.

This entry was posted on Thursday, February 5th, 2009 at 5:13 am and is filed under Bankruptcy, Debt Management. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

3 responses about “Debt Settlement vs Bankruptcy”

  1. Ryan Scott said:

    Bankruptcy hurts your credit report badly for many years, therefore debt settlement is a better option. Your debt levels also get reduced significantly in debt settlement as your debt amount is negotiated with your creditors. Freedom Debt Relief is a good choice to go for.

  2. Kenneth Long said:

    Dear Ryan Scott:

    Thank you for your comment however misguided it may be. For the record, Freedom Debt Relief aka Freedom Financial Network, LLC has an “F” rating with the Better Business Bureau. I have disabled your link to the website but am leaving your post so that readers will understand what these organizations really do. Here is the BBB reliability report for Freedom Debt Relief:

  3. Ryan Scott said:

    Dear Kenneth Long,

    I have used Freedom Debt Relief’s debt reduction program and they were pretty fast & helpful in negotiating with my creditor to lower my debt. I did not face any trouble, to be frank I am debt free now because of them.

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