When things are looking bad financially, you may be faced with a tough decision: Do you file for bankruptcy? Do you try and reach a debt settlement? What are the differences between the two? Knowing how both a debt settlement and a Chapter 7 bankruptcy can affect you is important, especially if you want to take the path that causes you the least financial damage. Both the debt settlement program and bankruptcy have benefits and drawbacks, and here we’ll go over some basic information comparing debt settlement to bankruptcy that will help you decide if it comes to that. The legal counsel for both options is similar. Many bankruptcy lawyers also offer debt settlement services. In the past, people would just get an equity loan after a bankruptcy discharge but the laws and guidelines have changed in recent years.

Debt settlement is essentially a negotiation with a creditor in order to reduce the amount that is owed on a debt in exchange for a lump sum paid to the creditor. Negotiating debt can often reduce it to anywhere between twenty-five and seventy-five percent of the debt, which can be a substantial amount. However, this amount must be paid as a lump sum, or in some cases, over the course of a short period of time (a month or two). Debt settlement can only be performed on unsecured debts, such as credit cards and medical bills.

Bankruptcy, on the other hand, takes a number of different forms. The most common type of bankruptcy for individuals is Chapter 7 bankruptcy, in which all non-exempt property owned by the person in debt is sold, and the proceeds are given to the creditors. This process is also known as liquidation. Chapter 7 bankruptcy has the advantage of allowing the person in debt to start fresh relatively quickly, and is often used by individuals with very large amounts of debt and few assets. Because bankruptcy is certainly more damaging in terms of loss of assets and credit, most people will attempt a debt settlement before declaring bankruptcy.

If you are in financial trouble and want to avoid bad credit in the future, a debt consolidation loan is often a sound option. Debt settlement should certainly at least be considered before jumping to bankruptcy, as Chapter 7 bankruptcy can have far-reaching repercussions that stay with you for a long time. However, failing to pay a debt settlement can be even more damaging. Consider all of your options and try some comparison shopping for debt settlements before making your final decision, as doing the right thing for you and your family should be a top priority.

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