Chat with us, powered by LiveChat

Debt Settlement vs Bankruptcy: Which is Right for You?

Dealing with overwhelming debt can feel scary and stressful. You may be struggling each month to make minimum payments, getting calls from creditors, or facing lawsuits over unpaid bills. At some point, you may start considering more serious debt relief options like debt settlement or bankruptcy to get out from under the crushing burden. But how do you know which option is right for you?

How Debt Settlement Works

Debt settlement involves working with a debt settlement company to negotiate down your total owed balances with creditors. The company will help you stop paying your unsecured debts temporarily so you can save up lump sums to offer creditors as negotiated payoff amounts. Here’s a quick rundown of the debt settlement process:

- -
  • You stop paying unsecured debts and instead make monthly contributions to a dedicated account. This helps you save up enough to make settlement offers.
  • The settlement company negotiates with your creditors to reduce your balances. A creditor may accept $5,000 on a $15,000 balance, for example.
  • Once enough is saved up, the funds are used to pay the settlement amounts creditors agree to. This satisfies the debts.

Debt settlement can seem ideal since balances get slashed significantly. However, it comes with major credit damage and risks:

  • Your credit score can plummet 100 points or more. Accounts will become delinquent and may ultimately show “settled” statuses.
  • Creditors can still sue you during settlement. Being sued means facing court judgments, wage garnishments, or bank account levies.
  • There’s no guarantee how much debt will actually get settled. It depends on creditor willingness to negotiate.

So while settlement can eliminate debt, the credit impacts and legal risks make it a poor choice for many consumers.

How Bankruptcy Works

Declaring bankruptcy legally eliminates many types of debt under court protection. The most common bankruptcy filings are Chapter 7 and Chapter 13. Here’s an overview:

Chapter 7 Bankruptcy

Chapter 7 bankruptcy involves liquidating non-exempt assets to pay back creditors. Remaining discharged debts are eliminated.The Chapter 7 process includes:

- -
  • Filing a petition with a bankruptcy court
  • Appearing at a meeting of creditors
  • Potentially surrendering some assets for liquidation
  • Getting most remaining debts legally eliminated

Chapter 7 has pros and cons to weigh:Pros

  • Eliminates eligible debt completely
  • Assets like retirement funds are protected
  • The process takes just 3-6 months


  • Assets could be liquidated, like a second car or vacation home
  • Hurts credit for years with public records
  • Can’t file again for 8 years

Chapter 7 works best if you have minimal assets or if surrendering property won’t create hardship. This allows eliminating debt fast.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy sets up 3-5 year debt repayment plans. You keep all property while making monthly payments to creditors through the court.The Chapter 13 process includes:

  • Filing a proposed repayment plan
  • Making payments over 3-5 years
  • Getting remaining debt discharged after repayment

Like Chapter 7, Chapter 13 has pros and cons:Pros

- -
  • Keep all property like cars or homes
  • Pause foreclosures and wage garnishments
  • Consolidate debts into one payment


  • Repayment plans take years to complete
  • If payments lapse, case gets dismissed
  • Plans can require substantial monthly contributions

Chapter 13 helps save assets while catching up on debt through time. But it involves years of court-managed payments.

Key Differences Between Debt Settlement and Bankruptcy

Debt settlement and bankruptcy offer very different debt relief solutions. Here are some of the biggest contrasts between the two options:

- -
Debt Settlement Bankruptcy
Process Work with settlement company to negotiate lump sum payoffs with creditors File a legal case in bankruptcy court to discharge debts under court protection
Cost Settlement fees + taxes on cancelled debt Court filing fees + attorney fees
Credit Impact Severe damage from missed payments and settled accounts Public records and score damage, but debts legally eliminated
Debt Elimination Partial and depends on creditor willingness to negotiate settlements Eliminates many debts completely upon discharge
Asset Liquidation None Chapter 7 can involve surrendering assets to be sold off
Legal Protections None, creditors can still sue and garnish wages Automatic stay halts collections and lawsuits. Wage garnishment avoided.
Time Frame 2-4 years typically Chapter 7 done in months. Chapter 13 takes 3-5 years.

This table summarizes how debt settlement and bankruptcy compare across some major factors. The right option depends hugely on your specific financial situation and debt relief goals.

Questions to Ask When Deciding Between Debt Settlement and Bankruptcy

Choosing between debt settlement and bankruptcy involves weighing some key personal factors. Important questions to ask yourself include:

  • What types of debt do I have? Debt settlement works for credit cards, personal loans, medical bills and other unsecured debts that can be negotiated. Student loans, taxes, alimony or child support don’t qualify. Bankruptcy eliminates more debt types, including medical bills and credit cards.
  • What assets do I need to protect? Bankruptcy helps safeguard assets like homes and cars through exemption rules. Debt settlement provides no special protections. Losing assets may influence your decision.
  • Can I afford the impacts of debt settlement? Missed payments wreck your credit while settling debts raises tax bills. If your finances are already tight, bankruptcy may be safer.
  • Do I have other financial goals? Eliminating debts through Chapter 7 bankruptcy can help you start rebuilding credit and savings faster. Debt settlement keeps you repaying debts for years.

Analyzing personal factors helps determine whether settling debts or eliminating them via bankruptcy works better for your situation.

Getting Help Deciding Between Debt Relief Options

Trying to weigh debt settlement against bankruptcy on your own feels confusing and stressful. But you can get specialized guidance to point your situation toward the right debt solution. Here are some options to consider:

  • Consult a nonprofit credit counselor. Reputable agencies like offer free consultations with certified counselors. They can review your full financial picture and explain pros, cons and alternatives.
  • Discuss options with a bankruptcy attorney. Local bankruptcy lawyers offer initial case evaluations, often with no upfront fees. This gives professional opinions on the best debt relief choice.
  • Compare settlement company proposals. Debt settlement companies provide free savings estimates. But also consult a neutral party, since settlements mainly benefit the company.

Getting professional advice helps ensure you understand everything debt settlement and bankruptcy involve. You can weigh how each option may impact your finances and life before deciding on the optimal debt relief strategy.

Key Takeaways on Debt Settlement vs. Bankruptcy

  • Debt settlement reduces balances owed through negotiated lump sum payoffs. This saves money but wrecks credit and risks collections and lawsuits.
  • Declaring bankruptcy legally eliminates debt under court protection. But it also causes credit damage and can involve losing assets.
  • Important factors that shape decisions between the two options include assets, budgets, credit scores and more.
  • Consulting credit counseling agencies, bankruptcy attorneys and settlement companies provides guidance on choosing the right debt relief path.

Facing overwhelming unsecured debts leaves consumers with difficult choices. But learning how programs like debt settlement and bankruptcy work can clarify the better option for each person’s financial situation. With professional help weighing the pros and cons of each, finding the right debt solution feels much less stressful.


Videos Explaining Debt Relief Options

Articles Comparing Debt Settlement and Bankruptcy

Debt Settlement vs Bankruptcy: Which Is Better for Getting Out of Debt?

Struggling with high amounts of debt can feel overwhelming. When you’ve tried budgeting, calling creditors for relief, or consolidating debt yet still face mounting interest fees and calls from collectors, more serious options like debt settlement and bankruptcy may seem like the only way out.But how do you know which route is best? While both debt settlement and bankruptcy can reduce or eliminate debt, they work very differently. Understanding the key differences between these two debt relief methods can help you make the smartest choice.

How Debt Settlement Works

Debt settlement, also called debt arbitration or debt negotiation, lets you settle your debts for less than you actually owe. Basically, you or a settlement company negotiates with your creditors to accept a lump sum payment that is less than the full balance. Creditors may agree to this because they’d rather get something instead of nothing if you file for bankruptcy.

- -
  • With debt settlement, you stop making payments on your debts and instead save up so you can make the negotiated lump sum settlement payment(s). This can take several years.
  • There’s no guarantee that all or any of your creditors will accept a settlement offer.
  • You’ll continue getting calls from collectors while saving up for settlements. Late fees and interest will continue adding up too.
  • Any forgiven debt from settlements may be taxed as income.

So debt settlement can work, but it has some big downsides. The process drags out for years while your debt grows. Plus, nothing prevents creditors from suing you in the meantime.

Understanding How Bankruptcy Works

Declaring bankruptcy legally eliminates or restructures debt you can’t afford. The most common types of personal bankruptcy filings are Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy wipes out eligible debt completely. This is known as a straight or liquidation bankruptcy.

  • Virtually all unsecured debt like credit cards, medical bills, personal loans, etc can be eliminated. Certain assets may be sold by the bankruptcy court to pay creditors.
  • The whole Chapter 7 process typically takes 3-6 months.
  • Bankruptcy stops collections activity cold with an automatic stay. Debt collectors must cease contact immediately. Wage garnishments also end.
  • Chapter 7 bankruptcy remains on your credit report for 10 years. You can rebuild credit after about a year though.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy sets up a 3-5 year repayment plan for your debt. It’s commonly known as a wage earner’s plan or reorganization bankruptcy.

- -
  • Rather than wiping debt out as with Chapter 7, the court approves a new payment plan to catch up on debts.
  • Payments under Chapter 13 are often less than what you originally owed across multiple accounts.
  • Chapter 13 stops collections and wage garnishments too.
  • As with Chapter 7, Chapter 13 bankruptcy stays on your credit report for 10 years.

Either type of bankruptcy requires that you pass a means test to qualify. This looks at your income, living expenses, and secured debts like mortgages or auto loans. But once you file, all collections activity halts immediately with federal legal bankruptcy protection.

Key Differences: Debt Settlement vs Bankruptcy

While both debt settlement and bankruptcy can reduce financial burdens, they work very differently:

  • Debt Settlement
    • Private process between you and creditors
    • No guarantee of settlements
    • Typically takes years to complete
    • Debt & fees continue mounting
    • Risk of getting sued
    • Possible tax implications
  • Bankruptcy
    • Federal court-managed process
    • Immediate halt to collections
    • Over in months (Chapter 7) or years (Chapter 13)
    • Stops wage garnishments
    • Long-term credit score impact

Bankruptcy protection also starts instantly upon filing, while debt settlement provides no legal shield from collections. Debt settlement may also not resolve all your problem accounts if some creditors won’t negotiate.

Is Debt Settlement or Bankruptcy Better for You?

There’s no one-size-fits-all answer to whether debt settlement or bankruptcy is the better choice. It depends entirely on your personal financial situation.Those barely keeping up with everyday expenses can get quick relief from harassing collections through bankruptcy. Settlement may work better for those with some savings able to endure a longer process.You can discuss your specific circumstances with a nonprofit credit counseling agency like InCharge Debt Solutions. Their certified counselors can help you review all debt relief options to find the right solution.If you do decide bankruptcy makes more sense, it’s smart to meet with a bankruptcy attorney. Attorneys are familiar with exemptions and other regulations that determine how bankruptcy will impact your property and assets. They also help ensure all the required paperwork gets filed properly with the court.

Making the Best Choice for Your Situation

When you simply cannot keep up with debt payments month after month, taking action is critical. Both debt settlement and bankruptcy offer ways to resolve debts you can no longer afford to pay. Consider all factors carefully, from cost to credit impact and beyond.Getting educated on how each debt relief method works can help you make the smartest decision. Finding an experienced credit counselor or bankruptcy attorney to discuss your specific situation is also wise.While debt feels overwhelming now, know that relief is possible, and brighter days lie ahead. Weigh both bankruptcy and settlement as options so you can take control of your finances again.

- -

Get Debt Relief Today

Delancey Street is here for you

Our team is available always to help you. Regardless of whether you need advice, or just want to run a scenario by us. We take pride in the fact our team loves working with our clients - and truly cares about their financial and mental wellbeing.

"Super fast, and super courteous, Delancey Street is amazing"
$500,000 MCA Restructured Over 3 Years
"Thanks for helping me in literally 24 hours"
$250,000 SBA Loan Offer in Compromise
"Great choice for business owners who need a trustworthy partner"
$350,000 MCA Restructured Over 2 Years

In The Media

Delancey Street CEO discusses ways to reward employees
Delancey Street CEO discusses the benefits of franchising on Forbes.
Delancey Street CEO discusses management on AMEX.
Best Colorado Criminal Lawyers

Best Colorado Criminal Lawyers Understanding What to Look For in…

Best California Personal Injury Lawyers

Best California Personal Injury Lawyers When it comes to personal…

Best California Divorce Lawyers

The Best Divorce Lawyers in California: Your Ultimate Guide What…

Best California Criminal Lawyers

Best California Criminal Lawyers What to Look For in a…

Best Arkansas Personal Injury Lawyers

Best Arkansas Personal Injury Lawyers Finding the right personal injury…

Delancey Street simply gets it. You're talking to experts.
Steven Norris
Get Help Today

Ready To Get Started?

If you have questions, feel free to shoot us an email, or fill out our live chat.

Schedule Consultation
Call Now For Consultation