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Comparison between Debt Settlement and Bankruptcy Featured

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Debt settlement and bankruptcy are the two most viable options for individuals when they are under the pressure of overwhelming debt. Both are quite effective ways to clear the debt and waive off the financial obligations. But they work in a different course of action. So you must choose any of the options depending on your fiscal situation. You must evaluate your fiscal position, and pick up an option considering its advantages, disadvantages, and how it works.

Function of debt settlement and bankruptcy:

Debt settlement and bankruptcy function in different ways. With debt settlement, you negotiate with your creditors in order to reduce the principal amount of debt owed. Debt settlement is useful for people when they significantly lag behind in paying the bills and when they owe unsecured debts like credit cards and utilities. With bankruptcy, you either wipe out the debt through chapter 7 or you repay over time through chapter 13.


Chapter 7 allows you to liquidate your non-exempt properties and pay off a certain amount of debt, and the rest is discharged by the court. And chapter 13 allows you to restructure your payment plan to clear your debt over a certain time period.

Processes involved:

The processes involved with debt settlement and bankruptcy are also different from each other. In debt settlement, you may hire a debt settlement company who will negotiate with the creditor on your behalf to reduce the debt, or you may personally negotiate with the creditors. However, in this context it is to be mentioned that creditors have no obligation in accepting your proposal, they may accept it or reject it. If your proposal is accepted, you may pay a lump-sum amount and clear the debt, or you may pay it off in several large payments. Generally, you can only negotiate with the creditors if you being default in paying the debt for last 90 days.


On the other hand, bankruptcy is a legal action that begins when you file a petition with the bankruptcy court. Once you declare a bankruptcy, creditors are prohibited from collecting your debt directly. However, the chapter 7 bankruptcy approximately takes six months to complete, and chapter 13 bankruptcy takes three to five years.

Cost factor:

Debt settlement can reduce 30 to 70 percent of the principal amount owed, depending on the creditors. Thus, you can save a considerable amount through debt settlement. If you hire the services of a debt settlement company, you must be aware that you may have to pay an upfront fee and several monthly fees.

Filing for chapter 7 bankruptcy you will have to pay a filling fee of $299, for chapter 13 you will have to $274. And if you hire an attorney for filing a bankruptcy, then you will have to pay hundreds and thousands of dollars as legal fees.


However, whether you choose debt settlement or you choose bankruptcy you must remember a few things, like neither of them can eliminate certain debts like tax debt, student loan, child support or alimony. Also, keep in mind the above discussion while choosing any of the two avenues of clearing the debt.

Last modified on Thursday, 04 October 2012 06:36
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If you are facing a foreclosure you still have several options which can stop the process, give you some valuable time, and/or possibly save your home.


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