Bankruptcy or Debt Settlement: Which Is the Better Choice?

Are you struggling with the choice between bankruptcy or debt settlement? When many people find themselves in a tough financial position, they instinctively want to avoid filing for bankruptcy at all costs. Therefore, they seek out the advice of a nonprofit credit counseling agency, which will help to create a debt management plan. Is this something you considered?

A debt settlement is an attempt to pay something less than what you originally agreed. When you use a nonprofit credit counseling agency, they will attempt to negotiate, on your behalf, a debt management plan with reduced or no interest, stopping or eliminating late fees, and possibly paying less than the total principal owed. During this time, you will make a single payment to the nonprofit credit counseling agency, and they then distribute the funds to creditors under the new terms. While it may feel like a debt consolidation, it is not. However, debt consolidation is an option.

Before choosing a nonprofit credit counseling agency, there are some pitfalls you must consider.

  • Added Fees - A nonprofit credit counseling agency will often ask you to stop making payments and have them make all contact and negotiations. While this happens, interest and late fees will continue to accrue.
  • Timeliness - A debt management plan can take 3 to 5 years, which can mean 36 to 60 months of additional fees and interest. Just because you are using a credit counseling agency does not mean you are saving money.
  • Credit Score - While on a debt management plan, there is a negative impact on your credit, which eventually will include reporting the account as settled for less. If it takes 5 years of payments, add another 7 years on your credit report history. That is 12 total years compared to 10 years for a bankruptcy.
  • Creditors Can Refuse - A creditor is under no legal obligation to negotiate a debt settlement. In fact, some have policies that they will refuse to negotiate with any credit counseling agency.

What haven't we covered yet that is important to you? If you would like to talk about choosing between bankruptcy or debt settlement, or need more information, please contact us.