Many people struggling with debt consider debt settlement as an alternative to filing bankruptcy. But is it really the better option? If you’re considering bankruptcy or debt settlement, here are the pros and cons:
Debt Settlement Pros
Debt settlement can seem like a desirable option, especially with the stigma attached to bankruptcy; however, it is only a wise choice in a few, specific circumstances. Here is one example:
Debt settlement might resolve your debts faster than Chapter 13 bankruptcy
If you do not qualify for Chapter 7, and are faced with either Chapter 13 or debt settlement, the latter may be an option worth looking into. The process can settle your debts a couple of years faster than the required 5-year repayment plan of the Chapter 13 process. Keep in mind, however, that debt settlement comes with some risk of lawsuits, and will not end harassment from collection calls.
Debt Settlement Cons
Debt settlement has many potential disadvantages when compared to bankruptcy, and is generally not recommended. These problems include:
A longer-lasting negative impact on your credit
Typically, both debt settlement and bankruptcy will drop a person’s credit score to well within the “poor” range. However, your credit score will be able to start recovering as soon as either process is complete: typically, a matter of months for Chapter 7 bankruptcy, or a matter of years for debt settlement.
The math does not always work in your favor
Debt settlements typically resolve 45-50% of the client’s current balance, which is usually higher than the initial balance due to fees and interest. Factor in the 20% settlement fee, plus taxes, and the settlement can cost you 90% or even more of the original amount you owed.
Debt settlement does not protect you
Debt settlement can take a long time, and the process does not stop collections activity or wage garnishments, and it does not protect you from getting sued.
Experts agree: both bankruptcy and debt settlement should be used only as a last resort. If you have exhausted your other options, such as refinancing with a personal loan and working with a credit counselor, then make sure to do your research carefully. Remember, only bankruptcy attorneys are required to put your needs first, so contacting one is a good idea.
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Automotive Fresh Start Center, LLC is NOT a debt relief agency, as defined in section 101(12A) of the Bankruptcy Code. We do not provide bankruptcy assistance. The articles, videos, images, digital products, and other content maintained on this site as well as the opinions voiced in this material are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual. No information on this site constitutes legal or financial advice and should not take the place of consulting with a licensed bankruptcy attorney, debt relief agency, or certified financial advisor.