Should I Settle my Debts or File for Bankruptcy?


When you’ve fallen behind on paying back borrowed money, you’re said to be in default. As soon as you fall into default, your credit score will go down, down, down until the debt is either brought current or becomes discharged.

So: if you’re late on paying some of your creditors, the longer you wait to come up with a plan, the worse off you’re going to be. Your main choices are: debt settlement or bankruptcy.

Unfortunately, many people don’t fully understand the term ‘debt settlement,’ and assume it has something to do with bankruptcy. In reality, debt settlement is the opposite of filing for bankruptcy, even though they both have the same end goal: getting out of debt.

Both debt settlement and bankruptcy will (as long as you qualify) help you eradicate many debts that you have defaulted on. The steps involved in each process are very different, however, and each will be right for different people.

What is ‘Debt Settlement’?

You and your debt relief attorney will work together to determine how much you need to “settle up” with all of your creditors. Naturally, this will involve having access to a significant sum of money in order to make the necessary payment(s).

The benefit of paying your creditors without entering into a Chapter 13 bankruptcy reorganization plan is that your credit score will bounce back a lot faster. The drawback, however, is that debt negotiations can be messy, stress-filled, and expensive.

How does Bankruptcy differ from ‘Debt Settlement’?

In all honesty, most debtors who are in default on one or more loans typically don’t have the kind of money necessary to settle up with their creditors. When you’re unable to pay your creditors back, whether due to unforeseen life circumstances or some poor financial decisions, filing for bankruptcy is a great option.

If you would potentially be able to repay your debts if they were reorganized, you might consider filing for a Chapter 13 bankruptcy. A Chapter 13 will allow you to continue paying your current debts, but at lower payments that may be stretched out over a longer period of time. You may also be given a reprieve period wherein you can skip a payment or two in order to get back on your feet. The missed payments may be tacked on to the end of your loan.

In order to have any debt completely wiped out, you’ll need to file for a Chapter 7 bankruptcy. With some exceptions, (student loan debt, court ordered child support, alimony and taxes) it is possible for all of your defaulted debt to be eradicated through a Chapter 7 bankruptcy.

Filing for either Chapter 7 or Chapter 13 will affect your credit score negatively; however, they are both excellent tools that can enable you to turn your finances around over the next few years. After filing for bankruptcy, you should still work closely with your bankruptcy attorney so that he can help you boost your credit score back up, up, up!

All in all, if you are in default on a loan, you have many different possible solutions. By taking the first step and reading about your options here, you’ve already shown that you’re ready to change. For a free consultation about the option that best fits your situation, call or write to us today! (732) 852-7295


Image credit: Sera

5 Responses to Should I Settle my Debts or File for Bankruptcy?

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