Bankruptcy vs. debt settlement: which is better?

If you are deep in debt and don’t anticipate your financial situation getting any better in the near future, you may be exploring your options for getting rid of your debt and starting over. Obviously, a Chapter 7 or Chapter 13 bankruptcy filing is one of these options. But, due to the common misconceptions about bankruptcy and a variety of other reasons, many people choose to work with a debt settlement company to repay their debt and get back on solid ground.

So which is the better solution? Is it better to file for bankruptcy or to go the debt settlement route?

Clearly, the answer to this situation varies significantly depending on each person’s individual situation. According to one bankruptcy attorney who also handles debt settlement cases, debt settlement is the best option for people who have a large amount of cash on hand to pay off a large chunk of a debt at the start of the process. Obviously, that will not be the case for many people who are struggling to make ends meet, but if it is possible to get a loan from a family member or from a home refinance, for example, debt settlement could work.

In most other cases, though, bankruptcy is probably the best option. There is no significant credit score benefit to using a debt settlement company instead of filing for bankruptcy. Further, settlement companies’ payment structures are set up so that their clients pay the company’s fees for several months before making any payments on their own debts. This could potentially lead to greater financial and legal trouble from creditors.

However, the best way to determine which option is the best for you is to contact a professional, such as a financial advisor or bankruptcy attorney, to discuss your options.

Source: Bankrate.com, “Bankruptcy often trumps debt settlement,” Justin Harelik