Debt Settlement vs Bankruptcy: Comparing Your Options

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Being confronted with having to choose between debt settlement and bankruptcy is a choice no one wants to make. When you are forced to choose, as the only viable means to regaining control of their finances, it is important to consider all of the pros and cons of both options before a final decision is made. 

Debt Settlement

The primary draw of debt settlement is that much of the debt that is owed is forgiven by the collection agency or creditor. Sometimes, as much as half of a single debt may be discharged. Other added bonuses of debt settlement include the following:

  • An individual may be free of debt in two to three years. This enables them to begin the process of rebuilding their credit.
  • Certain creditors may be willing to re-age accounts in an effort to raise credit scores.
  • Debt settlement typically ends all legal action against a debtor who may otherwise be hounded by collection agencies.
  • Credit scores may be saved from negative revisions if lenders agree to a settlement.

Debt Settlement Pitfalls

  • Debt settlement costs money, often including an upfront fee and a monthly fee thereafter paid to the debt settlement company. 
  • Credit scores often take a hit when information is sent to the credit reporting agency that a debt has been settled. 
  • Only unsecured loans are subject to debt settlement.
  • The amount of debt that is forgiven by creditors will be reported as income, and taxed as such. 


Bankruptcy, on the other hand, may be a more viable solution for those in debt whose primary concern is retaining possession of their assets. It is generally considered a last resort and will have a long standing effect on the filing individual's overall financial future. The primary benefits of bankruptcy include:

  • Filing for bankruptcy legally requires all collection agencies to cease any contact with the petitioner, including attempts at wage garnishments, repossession and foreclosure.
  • Most states permit the petitioner to exempt their house, vehicle and other basic assets from bankruptcy.
  • Declaring bankruptcy helps provide a faster route toward rebuilding finances and credit.

Bankruptcy Pitfalls

The drawbacks to filing for bankruptcy are many. Among them are the following:

  • All credit cards will be closed, essentially leaving you without access to credit. 
  • Bankruptcy will make it exceptionally difficult for the you to qualify for a mortgage for at least five years.
  • A declaration of bankruptcy will stay on your credit report for 10 years.
  • Certain types of debt cannot be discharged under bankruptcy, like student loans and back taxes.