Debt Settlement vs. Bankruptcy: Which is the Better Option? |

Many people have been struggling in the current economy. Prices are going up for food, gas, and other necessities. Credit card debt has been compounding for many people.

Many Americans are drowning in debt. To deal with this, many people seek debt relief. The most common forms of effective debt relief are bankruptcy and debt settlement. While both can eliminate debt, these methods have different processes and consequences. Here’s what you need to know.

Debt Settlement

Debt settlement is a negotiation process where you (or a company acting on your behalf) work with creditors to reduce the amount of debt owed. This method typically involves a lump sum payment or structured settlement for less than the total amount owed.

Debt settlement is best for those with moderate debt who can afford partial repayment as well as people wanting to avoid bankruptcy and are willing to accept the risks involved.

Debt settlement has several main advantages:

It keeps bankruptcy off your credit report.
It can significantly reduce the amount you owe.
You tend to have more control over the process compared to bankruptcy.
There is less stigma involved, as it is generally viewed as less severe than bankruptcy.

However, debt settlement can still harm your credit score. There are high fees involved (20 to 25% of the enrolled debt). Plus, it is not guaranteed, as creditors are not obligated to settle.

Bankruptcy

Bankruptcy is a legal process that allows you to discharge or reorganize debt under court supervision. There are two main types:

Chapter 7: This is the liquidation of assets to pay off debts; remaining unsecured debts are discharged.
Chapter 13: This is a repayment plan for a portion of the debt over 3 to 5 years.

Bankruptcy is best for those with overwhelming debt they cannot realistically pay off. It’s also good for those facing legal actions from creditors or severe financial hardship.

Bankruptcy has several main benefits:

It offers a fresh start, eliminating most unsecured debts (such as credit cards and medical bills) under Chapter 7.
It has legal protections, stopping wage garnishments, lawsuits, and creditor harassment through an automatic stay.
Chapter 13 offers a clear, court-supervised repayment schedule so you can keep your assets.

However, bankruptcy has some drawbacks. It greatly impacts your credit, as bankruptcy stays on your credit report for 7 to 10 years. You could lose assets, as non-exempt assets may be liquidated under Chapter 7. There are also eligibility limits. Chapter 7 has income restrictions, while Chapter 13 requires a steady income. Plus, the legal fees and court costs can be significant, costing thousands of dollars.

Get Expert Advice

Debt settlement and bankruptcy are both good ways to reduce debt. However, they work in different ways, so it’s important to fully understand them so you can make the right decision. In Maryland, The Law Offices of Adam M. Freiman is an experienced bankruptcy law firm that can help you erase your debt and give you the best advice on what path is right for you.