Choosing between bankruptcy and debt settlement is deeply personal and the answer isn't the same for everybody. For example, a 19-year-old college student who racks up significant credit card debt could file for bankruptcy and start recovering in just months---with the bankruptcy erased from credit reports before the age of 30. Meanwhile, a 45-year-old homemaker with excessive debt may choose debt settlement, rather than commit to a Chapter 13 bankruptcy, which requires three to five years to finish.
Settlement
Credit cards and other secured debts are often resolved through debt settlement. Settlement allows for full payment of the accounts for less than the amount owed. Savings usually range from 20 to 70 percent, according to SmartMoney. Creditors are not required to settle delinquent debts, but it is a common practice, according to the Federal Trade Commission. The agency recommends debt settlement over bankruptcy because it is less damaging to credit.
Chapter 7 Bankruptcy
Chapter 7 is one of two popular forms of bankruptcy. It is the quickest form of bankruptcy, with completion possible in as little as three or four months. It is considered a "straight" bankruptcy as it quickly liquidates non-exempt assets to pay creditors. Chapter 7 bankruptcy filers keep most assets through exceptions called exemptions. A primary residence and cars are usually protected in Chapter 7, while other assets such as valuable art collections are at risk. Income requirements for Chapter 7 vary by the state, and usually only people with low incomes qualify.
Credit Card Debt
Some people with modest incomes and few assets to protect consider Chapter 7 ideal, especially if they have lots of credit card debt. Chapter 7 completely eliminates credit card debt. Theoretically, someone with $65,000 in assorted credit card debt and few assets could wipe out the debt in 90 days without paying a penny towards the debt and without losing any personal property. For some people that is a better alternative than debt settlement, which requires payment of some of the debt, sometimes in a lump sum.
Chapter 13 Bankruptcy
Chapter 13 is similar to Chapter 7, and all people qualify regardless of income. However, Chapter 13 requires a payment plan of three to five years. Any unsecured debt remaining after the plan is eliminated. Some people struggle with the many restrictions of Chapter 13. The bankruptcy court must approve living expenses, with any money left over used to pay creditors. Some people who don't want the oversight opt for debt settlement instead.
Credit Impact
Debt settlement and bankruptcy both ruin credit initially, but bankruptcy carries a greater stigma because it is the most negative credit information possible for credit reports. Bankruptcy information is listed on credit reports for 10 years, while settlement information is listed for seven. However, it is possible for credit scores to recover from either within two or three years of completion of the respective programs.
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