Bankruptcy is often the last resort for consumers buried under large amounts of debt. The process has many drawbacks including asset liquidation and the significant damage done to a credit rating. A debt settlement can be an attractive alternative to bankruptcy if consumers are looking to rid themselves of a couple of delinquent accounts as opposed to an entire credit history.
No Court Appearance
A debt settlement is an agreement between you and your lender or collection agency. You are not required to appear in court or file any formal paperwork with a court to finalize a debt settlement agreement. This is a favorable alternative over bankruptcy for some because of the complicated paperwork associated with the bankruptcy process and the obligation to appear in court and answer questions under oath. A bankruptcy may be rejected if paperwork is missing or filed incorrectly. This can leave a debtor open to renewed collection proceedings from creditors.
Retaining Assets
Chapter 7 bankruptcy may require the liquidation of valuable assets including your home or your car to pay off your creditors. A debt settlement requires no liquidation of your assets to pay off your creditor. The settlement is also highly targeted, meaning the agreement usually only involves one creditor, though it may involve multiple credit accounts if they are held by the same creditor. Chapter 13 bankruptcy requires a lengthy repayment period lasting as long as five years. A debt settlement is often concluded after one payment or several smaller payments.
Less Credit Damage
A debt settlement damages your credit score because it shows you paid off a debt for less than was owed. The hit to your credit score caused by a debt settlement is less than the credit damage caused by a bankruptcy which can wipe out all of your accounts and leave you with no credit history. If you only have one delinquent account, a debt settlement can end collection practices and get your credit rating back on the right path.
Affect on Other Accounts
A debt settlement shouldn't adversely affect your other credit accounts. Your agreements with other creditors remain intact and you are able to keep other accounts open. A bankruptcy usually wipes your credit clean, meaning you have no open credit accounts. This may not be an attractive option if you have handled other credit accounts responsibly and only wish to take advantage of a debt settlement to close a specific account that is delinquent or entering into default. Keeping accounts in good standing open can also have a positive affect on your credit score.
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