Deciding between debt settlement and bankruptcy can be overwhelming, but understanding the key differences can help you make the best choice for your financial future.
How Debt Settlement Works
In a typical debt settlement scenario, you stop paying your bills and wait for your accounts to be sold to a debt collector. At that point, you can often negotiate to pay around 50% of the original amount owed.
For example, if you owe Capital One $5,000, you stop making payments. Capital One eventually sells the debt to a collector for around $250. The debt collector may then settle with you for about $2,500—but they usually require a lump sum payment, not installments.
Debt settlement can seem appealing, but there are downsides:
- Your credit score will take a hit from missed payments and settling for less than you owe.
- You’ll still have to come up with thousands of dollars at once.
- Forgiven debt over $600 may be counted as taxable income by the IRS.
- Some creditors refuse to settle at all.
How Bankruptcy Works
Bankruptcy eliminates debts by law, reducing them to a $0 balance. Unlike debt settlement, you don’t need to negotiate with creditors or come up with lump-sum payments.
The benefits of bankruptcy include:
- Immediate relief—no more debt collector calls or lawsuits.
- Better credit recovery—most people reach a 720 credit score just two years after filing.
- Debt-free faster—Chapter 7 wipes out unsecured debt in about four months.
- Asset protection—your home, car, and retirement accounts are usually protected.
- No tax consequences—unlike debt settlement, canceled debts in bankruptcy are not taxable income.
Debt Settlement vs. Bankruptcy: Which Is Best for You?
- Debt settlement may be better if you have substantial savings or own valuable assets (like a cabin or rental property) that aren’t protected in bankruptcy.
- Bankruptcy is usually the best path if you’re living paycheck to paycheck and don’t have large savings. Plus, we can even file your case with no money upfront.
Get a Free Attorney Consultation
Still unsure about your options? At Walker & Walker, we offer a free consultation to help you make the best financial decision. Call us at 612-824-4357 or book online today!
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