Financial difficulties and crises are undoubtedly, distressing particularly in today’s economic scenario. When foreclosure rates and unemployment cases are high, it is no surprise that you are not able to pay your debts and are looking for an effective solution. Debt settlement as well as bankruptcy has merits and demerits, however, you need to find out if either of the two debt management techniques will work for you. Knowing how to compare between debt settlement and bankruptcy can prove to be useful in your decision.

Examining Your Credit Report

Your credit report is very important when you are thinking of adopting a debt management process. First and most important step is to obtain a copy of it and assess thoroughly to get a precise idea about your debt level. You should check your credit reports accurately from all the credit reporting agencies. This is necessary as all your creditors may not be filing with all the three agencies. You must check thoroughly and try to locate any discrepancies so that you do not end up settling debts you do not really have. You can get one free report every year.

Calculating Your Debts and Income Sources

The second important step is to get down to making two lists. One list should include all your debts and also, the monthly payments required to meet those debts. The other list should include all your sources of net income. Depending on the existing state laws, you may leave out your main residence mortgage and also, car notes if these are protected by existing state law. However, you need to include all your bills including utilities to determine your accurate monthly debt as well as monthly income.

Finding the Better Option

Debt settlement could be the best choice provided your income is more than your debts every month. A debt settlement plan would necessitate payment of a lump sum to a debt settlement company so that the company can pay back your creditors.

Bankruptcy could be your best choice provided your debts are exceeding your monthly income. Depending on your financial status and your total amount of debt you may qualify for Chapter 7 or may be Chapter 13 bankruptcy. In case you have been paying the minimum amount due every month without fail and are now faced with a serious financial crisis due to a job loss, divorce, or serious illness, you may then go for Chapter 7 bankruptcy that would erase all debt.

However, if you are still left with some assets that could be sold off by the court or in case, you have some money left each month to make payments, you may qualify for Chapter 13 bankruptcy. In this case, you may get the opportunity to pay back your debts over an extended period.

Comparing Impact on Credit Scores

This is a vital step. You must examine exactly how debt settlement or for that matter bankruptcy would impact your credit score and also, your future buying capacity. It is important to note that debt settlement may trigger reduction in your credit score by at least 50 points. Your credit score would go down more, if you have been doing late payments or even skipping payments.

However, bankruptcy would at once result in reducing your credit score by at least 200 points and this will be staying in your credit profile for seven to ten years. This could mean that it would be difficult for you to buy a house or car or qualify for credit cards for several years to come.

Calculate Accurately Your Actual Costs Involved in Both

You need to pay a lump sum in debt settlement along with your usual monthly minimum payments till the debt settlement plan is activated. On the other hand, before filing the bankruptcy case, you would be required to pay filing fees, court costs and the retainer as per the instructions of a bankruptcy attorney. Once the retainer has been paid, you may be advised by your attorney to stop all payments related to unsecured debt. You would be asked to read out a script to all your creditors, if they call you. In the event, you have been approved for Chapter 13 Bankruptcy; you will have to resume payments.


If you are considering debt management by either debt settlement or bankruptcy, it is fairly clear that your credit score is already tarnished. Always keep in mind that you would be able to rebuild your credit once bankruptcy or debt settlement is complete. You must definitely alter your spending ways and habits. Learn to live within your means for a better tomorrow. You may find debt settlement reviews helpful in making your final choice.

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