Bankruptcy & Debt Settlement: Which One Suits Your Needs? (2024)

FAQs

Which option should you try first to solve debt problems debt consolidation or bankruptcy? ›

For most people, debt consolidation is the better choice. When comparing the two options, here's what to consider: With debt consolidation, you'll pay less in fees. Balance transfer cards typically charge a balance transfer fee of 3% to 5%.

If you're behind on your credit card payments and looking for a solution, you might be considering debt settlement, which promises to help clear your debts. However, debt settlement is risky and should be a last resort for most borrowers.

It might be time to declare bankruptcy, if, for example, you have large debts that you can't repay, are behind in your mortgage payments and are in danger of foreclosure, or are getting calls from bill collectors. Bankruptcy can often reduce or eliminate your debts, save your home, and keep bill collectors at bay.

Debt settlement can be more lengthy than bankruptcy, and will still damage your credit score. If you need immediate relief or do not have the ability to pay monthly fees, bankruptcy may be the best (or only) solution.

Debt consolidation is almost always the better choice. And while it doesn't change how much you owe, you might save by getting a lower interest rate. However, you usually need at least good credit for this tactic to work.

The only problem is that getting approved for a debt consolidation loan generally requires you to have good credit and a strong borrower profile. And, if you apply and are denied for a debt consolidation loan, it can feel like a major setback. Being turned down doesn't mean you're out of options, though.

What Percentage Should You Offer to Settle Debt? Consider starting debt settlement negotiations by offering to pay a lump sum of 25% or 30% of your outstanding balance in exchange for debt forgiveness. However, expect the creditor to counter with a request for a greater amount.

Debt settlement companies charge a fee, generally 15-25% of the debt the company is settling. The American Fair Credit Council found that consumers enrolled in debt settlement ended up paying about 50% of what they initially owed on their debt, but they also paid fees that cut into their savings.

The good news is that if you – or the attorney you hire – gets the paperwork right and the case moves through the court to the point where debt discharge is determined, the U.S. Bankruptcy Courts says that 99% of Chapter 7 cases succeed. Unfortunately, many don't make it that far and their petition is denied.

What is the highest priority in bankruptcy? ›

Bankruptcy is designed to be used as a last resort when you have exhausted all other options. Depending on the bankruptcy option you choose, you may be able to eliminate all or some of your debt — or restructure it so monthly payments are within your budget.

Loss of Property

Even with Chapter 13 bankruptcy, you may need to sell off certain assets to afford your payments. If you include secured debt, such as a mortgage loan or auto loan, in your bankruptcy filing, you could also lose the property or vehicle you used as collateral for the debt.

Key takeaways. Loans, medical debt and credit card debt are generally all able to be discharged through bankruptcy. Tax debt, alimony, spousal or child support and student loans are all typically ineligible for discharge.

A debt consolidation isn't necessarily better than a bankruptcy, but it won't hurt your credit score nearly as much. That said, it will have a smaller impact on the money you save on your debt, only affecting your interest rate.

While bankruptcy provides more immediate relief, the legal fees can add up quickly, and you'll owe many of them upfront. Debt relief programs, on the other hand, do not charge upfront costs. In fact, there are laws prohibiting them from doing so.

Debt consolidation might be a good idea if you can get a lower interest rate than you're currently paying. That will help you reduce your total debt and reorganize it so you can pay it off faster.

It's often more cost effective to focus on clearing your most expensive debt first, simply for the reason that your most expensive debt is costing you the most money. By getting rid of it, you'll have more money freed up to put towards paying off your other less expensive debts until you are debt-free.