Сhoosing Your Best Debt Relief Program: Debt Settlement vs. Bankruptcy

Complex issues like the inability to pay debts require careful analysis and a thoughtful action plan. The program should be determined depending on your specific situation. Before making any decision, you need to familiarize yourself with the available options offered by advanced services such as DebtStoppers. In this article, you will learn what debt settlement and bankruptcy are, how they differ, and when you should opt for which one.

Debt Settlement

Debt settlement is the process where the company handling your case negotiates with your creditor(s). During this time, you stop paying the money to the lender and instead transfer it to the negotiating firm’s account. The main goal of this method is to reduce the final amount of your debt. Since you stopped paying the lender, chances are they will be ready to charge you less just to get some money.

You can give preference to the debt settlement way if you have the funds to cover at least part of the debt, are ready to negotiate, or have no reason to claim bankruptcy. At the same time, you should have a stable income that allows you to pay off debts, incoming bills (for example, rent for a house) and set aside small amounts for unforeseen expenses.

The deadline for completing all proceedings can vary significantly depending on the number of creditors you owe. On average, it takes at least three or four years.


This financial relief method has the following advantages:

  • Thanks to it, you will have to pay only a part of the amount, and not the whole debt.
  • Debt settlement does not have a long-term and dramatic effect on your credit score.
  • Since this option does not require an appeal to courts, information, data, and documents remain in your personal use and don’t become available to third parties.
  • You can negotiate with creditors on your own or contact specialized companies.
  • If you turned to competent specialists, thanks to their numerous contacts, they can agree faster and on more favorable terms for you.
  • Settlement companies usually take on calls from collectors, lenders, and banks. So there will be less psychological pressure on you.

You can arrange debt settlement negotiations with creditors on your own, as it is a simpler procedure than bankruptcy claiming and does not require going to court. The main thing is to carefully study all the pitfalls and think over a payment plan that you will be able to implement.


Despite the seeming convenience and simplicity, the debt settlement program has several disadvantages:

  • The lender may not agree to the proposed terms and refuse to reduce the amount of your debt.
  • Also, credit organizations may renounce working with the company you choose to conduct negotiations.
  • If you choose to cooperate without the participation of third-party firms, you may not take into account all the specifics of your situation and pick the wrong action plan.
  • As you stop paying money to the creditor’s account, in certain situations, it may lead to lawsuits.
  • The tax authorities consider the difference between the initial amount of debt and the subsequent size as income. You will have to pay the related tax.


Bankruptcy is a complex financial relief procedure that has two options (Chapters 7th and 13th). Upon successful completion of the proceedings, the court may declare you incapable of fulfilling financial obligations to the creditor. It can partially or entirely write off your debts to banks, legal entities, or other individuals.

It is worth choosing this option if you do not have the opportunity to pay off your existing debts partially. Since declaring an individual bankrupt is a rather complicated process that requires going to court, it is recommended to consult with specialists beforehand. As a rule, the initial sessions are free, and after them, you will be able to understand your situation and the available opportunities more clearly.

Compared to other debt relief methods, bankruptcy usually does not take long. Depending on your current situation, the entire process can take up to eight months from the date of filing the necessary documents.


While getting bankrupt may sound daunting to some inexperienced persons, it has its advantages:

  • You will get a quick resolution of a difficult situation.
  • It is possible to partially or completely write off the accumulated debts to several creditors.
  • You will not have to pay taxes on the amounts that were forgiven after receiving bankruptcy status.
  • If your credit rating has dropped very low after this procedure, you may be able to recover it faster than with other debt relief programs.

The specifics and conditions of this procedure may differ depending on the region. There are places where certain property types cannot be taken off for bankruptcy. So you have the chance to keep the really important possessions.


Like any strategy, bankruptcy has its drawbacks that shouldn’t be underestimated:

  • The bankruptcy status significantly affects your credit score. The higher it was, the lower it would fall.
  • The consequences of this process, depending on the Chapter, can affect you within the next 7-10 years.
  • Since the court makes the bankruptcy decision, all documents in your case will be freely available. Future lenders, employers, tenants, etc. will be able to find and read them.
  • Before choosing this strategy, it is strongly recommended to contact the specialists to make sure that you have no other options.
  • Some debts cannot be repaid through bankruptcy (for example, income taxes, alimony, or student loans).

Which Is Right for You?

There is no unequivocal answer to this question and no universal solution. In each case, there may be many nuances that can affect the decision of creditors or courts. In some complicated situations, bankruptcy is the only possible way out; in others, it is better to opt for debt settlement if you are ready to continue paying off the debt. Contact qualified specialists who will carefully analyze your documents and offer the most optimal action plan to make the right decision.

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