Debt Settlement vs. Bankruptcy: What’s Worse For Your Credit Score?


Dear let’s talk credit,

What is the difference (impact on credit rating) between debt settlement and bankruptcy? My wife and I have $ 90,000 in credit card debt with five companies and are unable to handle the monthly payments.

– Eric

Dear Eric,

Bankruptcy will usually cause the most damage to your credit report. Chapter 7 and 11 bankruptcies stay on your credit report for 10 years from the date of filing. A Chapter 13 bankruptcy will remain on your report for seven years from the date of filing. Accounts associated with bankruptcy or debt settlement are deleted from your credit report seven years after the first date of default.

Start by consulting a nonprofit credit counseling agency that is a member of the Association of independent consumer credit counseling agencies or the National Foundation for Credit Counseling. You may be eligible for a debt management plan, which could allow you to pay off your debt with an affordable monthly payment that won’t damage your credit like debt settlement or bankruptcy.

If you don’t have enough income for a debt management plan, or if you decide you’d rather pursue another option, keep in mind that debt settlement will likely ask you to make a lump sum payment to settle the account. For most people, that would require stopping all payments to accounts and saving money until you have enough to make a settlement offer. In the meantime, your credit will be damaged and you could be sued by your creditors.

Bankruptcy can be costly. Chapter 7 bankruptcies are limited by strict income requirements. A Chapter 13 Bankruptcy would require you to repay at least part of the $ 90,000 you owe your creditors over a five-year period. The judge will decide how much of your income will be needed to pay off your creditors based on the bankruptcy laws that apply in your state.

If you want to explore debt settlement or bankruptcy options, I recommend that you consult an experienced lawyer.

The key to getting out of this large debt and the consequences it entails is to avoid accumulating so much debt in the future. Make sure you have a plan to avoid accumulating debt and set aside your savings for urgent and unforeseen expenses.

Let’s keep talking!

See linked: 8 myths about credit card debt settlement

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