When you are struggling with debt, it may be serious enough to come down to only two resolutions: debt settlement or bankruptcy. When debt issues become this serious, it is important to understand what you are facing with both options.

Here is a look at the basic breakdown of how each debt relief process can affect you and your overall financial life now and in the future:

Comparing the Options

Both debt settlement and bankruptcy are serious undertakings for eliminating debt and starting back on the road to a debt free life. However, neither is an overnight or quick-fix solution.

Debt Settlement

Debt settlement involves the process of the consumer or a third-party debt settlement agency contacting your creditors directly to request a debt settlement. In order to be successful with this process, you need to have the cash to back up your agreement.

Once you commit to paying a reduced amount to settle your debts, you must follow through with payment. This will require your review of your budget and even some time to save up enough cash to make a reasonable offer. Some companies will outright refuse any kind of settlement regardless of who is making the request. Other companies will be more flexible because they know that it may be their only chance at getting something from you towards the balance. Rather than face the risk of a total loss, many will agree to work with you to settle the debt for a lesser amount than owed.

Those creditors that are agreeable to a settlement will either expect a one-time lump sum payment immediately or will allow for a few payments for the months going forward. It will depend on the creditor and the size of the debt.

If you have not been in communication with your creditors during your hardship, a creditor will likely not take many risks and demand payment upfront. Many will also likely use pressure tactics to try and talk you into paying more. If you stand your ground about your repayment ability and are basically honest with your situation, you can likely settle the debt effectively.

If you hire a third party agency, you will be responsible for not only paying the costs for settling your debts but will also have to pay a percentage to the agency handling the work. If you do the work yourself, you will cut out the costs of the fees but still need enough money to make lump sum payments if required. Debt settlement may also have a significant impact on your credit score as the creditors will report back that you have ‘settled for less than owed’ which signals you may be a credit risk to future lenders.


Years ago, bankruptcy used to be used as a fail-safe to get out of debts. Large debts would be put into bankruptcy in an effort to wipe the slate clean for consumers. However, the bankruptcy rules have changed and it is now a much more involved process that may not necessarily come out in your favor. There will always be some debts you can not put into bankruptcy court.

Additionally, you will have to go before a judge and your creditors will be requested to appear to plead their case. If it is found you have not been entirely upfront and have acquired debts due to poor money management, you potentially face the possibility you will still be responsible for your debts, even after the long trial process and other legal red tape.

If you are seriously in trouble with debt and bankruptcy is legitimately your only option, it is advisable to seek the counsel of a qualified attorney for help. Bankruptcy should be the very last course of action to take. Depending on what the court decides, you can effectively find relief from debts in order to start rebuilding your credit. However, a bankruptcy filing will remain on your credit report for up to 10 years. You will find it very difficult to secure other financing in that time and your credit score will drop accordingly.

Bankruptcy is also not a cheap option. In addition to attorney fees, there will be court costs for filing and other legal-related services. You must be able to afford bankruptcy proceedings in order to move forward. An attorney can advise you of the process and costs if you are considering bankruptcy but if you are already struggling with debts, bankruptcy costs may not be reasonable.

Making the Choice

Ultimately, both options are a way to get out from under the heavy burden of debt but nothing can be done in a hurry. A good start on the road to debt relief is to measure your capabilities by reviewing your budget and working to free up some money to be used to help your financial issues.

There is no one-size-fits-all solution to debt relief. The ins and outs of both debt settlement and bankruptcy will affect people in different ways. Regardless of your decision know that unless you take control of your debts as soon as possible, your debts can quickly take control of you.

Frank Collins is a seasoned personal and business finance writer.

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