Bankruptcy vs. Debt Settlement

Factors for Deciding Which Option is Right for You

Debt to Income Ratio:

How much debt are you carrying compared to your available income? This is a critical factor.  A person earning $45,000 per year with debts of $20,000 has a big problem because debt settlement will not be feasible leaving bankruptcy as the only option to eliminate debt. However, if a person is earning $70,000 per year with the same $20,000 debt, they have a better chance of solving their debt problem outside of bankruptcy.

Interest rate:

This is an enormous factor. Are debts accruing interest at 7% (mortgage loan), 33% (credit cards) or, in some cases, at 333% (Pay-Day loans) per year? The higher the interest rate, the less likely debt settlement will work.

Length of time to repay debts:

How long can payments be spread out …. 5 years, 7 years, 10 years?!?  In Chapter 7 Bankruptcy your debts are eliminated. In Chapter 13 Bankruptcy you pay for 3 to 5 years, and your debts are eliminated.  

Future credit rating:

This is a big concern for many.  It is problematic if you have a low credit score in our society and economy. So many things are impacted by good, average, and poor credit scores, including whether you can get a loan in the future, the interest rate you pay, and even how much you pay for distinct types of insurance. Your credit score can even impact whether you may rent an apartment or car, and even your ability to obtain certain jobs. Good credit opens many doors. Your credit rebounds from bankruptcy in a relatively brief period of time, whereas debt settlement programs may keep your credit score low for years on end. 

Chances of success in dealing with a large debt problem:

This is something anyone considering debt settlement must think about.  If a person chooses the debt settlement route, what are the chances of it working and accomplishing an acceptable outcome?  Conversely, while no two cases are the same, bankruptcy has an objective goal with an end in sight. 

Loss of assets:

Will I lose anything filing bankruptcy or in debt settlement? That is an important question and one that usually can be answered in a straightforward manner by an experienced bankruptcy attorney.

Permanent consequences:

There is a lot of fear in this category. Most people worry that bankruptcy will permanently affect the rest of their life in some way or another. At the same time, not enough people consider how debt settlement will affect the rest of their life. It is a fair question to ask and one to consider seriously. There is no perfect answer and bankruptcy rarely affects anyone beyond 3-4 years and is completely off their credit report in 10 years. On the other hand, debt settlement normally does severe damage to a person’s credit with no definitive answer to when things will improve.

Bankruptcy Has a Better Record of Success:

The above factors are all important and deserve a deep-dive discussion, with an experienced bankruptcy professional. What you should know is that an experienced bankruptcy attorney and other knowledgeable financial advisors can provide you with specific answers to your questions and properly advise you.

The reality is that bankruptcy is far more likely to succeed in solving your debt problems and getting you a fresh start. Bankruptcy cases also come in different varieties because there is no one size fits all solution.

Bankruptcy works because it has a known starting point and a highly expected ending point of success. By contrast, debt settlements are highly variable in their outcomes, are expensive, time-consuming, and the results just are not very good for most people.

Bankruptcy Rebounds Credit Faster:

Speaking from personal observation of clients who have filed for bankruptcy and received a discharge, obtaining new credit has not been overly difficult.  Many former clients over the years tell me that filing for bankruptcy was the best financial decision they ever made, and had they not done so, that they would still be struggling.

According to an October 20, 2020, article in NerdWallet entitled “When Bankruptcy is the Best Option”:

“‘Within a year, you are way better off,’ says Jaromir Nosal, assistant professor of economics at Boston College, who co-authored a study for the Federal Reserve Bank of New York about the effects of bankruptcy. ‘It’s [bankruptcy] a pretty rapid rate of recovery.’”

A Caution on Using Debt Settlement:

Debt settlement may better suit some people, but if you are being crushed financially and emotionally by debt with no obvious way out, you need to get serious about your options. Bankruptcy offers a much clearer path but if you choose debt settlement, know that it is not easy and there is a big price to pay for doing so.

Debt settlement is risky because:

• It can be costly.
• It can destroy your credit.
• It takes a long time. Getting any net benefit requires sticking with a program long enough to settle all your debts — often two to four years.

We are Here to Help:

With over 100 years of combined experience with Michigan bankruptcy law, we are here for you. Contact us to speak to one of our experienced bankruptcy lawyers or to arrange a free initial consultation.