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Bankruptcy vs Debt Settlement
When should you choose debt consolidation over bankruptcy? It boils down to your individual financial situation. Both are meant to relieve you of your debt. But that's where the similarities end.
Bankruptcy can be divided into Chapter 7 which liquidates your debt and Chapter 13 which reorganizes it. Chapter 7 may require the sale of some of your secured property to pay back some of the debts, but most or all of all your unsecured debt will be erased. On the flip side, not everyone qualifies for a Chapter 7. You may be switched over to a Chapter 13 if you have a sufficient amount of disposable income. In this case, a repayment schedule will be created by the bankruptcy court to pay back your debt. No matter which bankruptcy you choose, it will be on your credit report for up to 10 years.
Now let's look at debt settlement. With debt settlement your unsecure debt is negotiated by the debt settlement agency down to as low as 40% of what you owe. This is done by settling your debt in bulk. Instead of approaching your creditors with just your debt, the debt settlement agency combines yours with many other accounts it represents. This increases the bargaining power with the creditors. Please note that debt settlement is NOT a solution for secured loans such as auto loans, home loans, student loans, or taxes.
In debt settlement you are set up with monthly payments that are usually up to a half of your current minimum payments. You'll be typically done with your debt settlement payments in 2-3 years (depending on your debt amount). One negative of debt settlement is that your creditors probably will report your accounts as late to the credit bureau until you settle. Once the account is paid or settled, the creditors generally report the account as "settled" to the credit bureaus. In some instances, the debt settlement agency will even negotiate to erase any derogatory marks while you were in the program. Either way, you will probably see this as a more viable option compared to filing bankruptcy, which stays on your credit report for ten years!