How does bankruptcy compare to a debt settlement plan?

You are asking a very common question: how does bankruptcy compare to a debt settlement plan? The answer is, they are as comparable as surgery and chiropractic manipulation—which is to say, not very comparable. They both could cure the problem, but the way they do it, the time it takes, the costs, and the risks are very different.

Bankruptcy is a legal proceeding. It is something that, subject to some restrictions, everyone has a right to do. That’s one of its significant advantages—you don’t need to negotiate with creditors or get their approval. Also, bankruptcy will affect essentially all your debts at once, though certain debts (like tax debts, or child support) might not be dischargeable. That’s its other big advantage.

Bankruptcy’s disadvantage is that it’s the “nuclear option” of dealing with debt. It will greatly impact your ability to get credit for many years, and depending on the type of bankruptcy you chose, will either force you to liquidate most of your belongs and assets, selling them for your creditors’ benefit, or force you to live within a very strict, court-approved budget or plan.

Debt settlement is simply negotiating with creditors to get them to accept less than full payment as payment in full. The incentive for creditors to do this is that it gets them some of their money quickly, without having to go to court. The advantage for you is that it eliminates much of your debt without the drastic consequences of bankruptcy.

The disadvantages of debt settlement are (1) it’s voluntary on the part of creditors—so the creditors don’t have to agree to it; and (2) you need to negotiate with each creditor separately. It can therefore be very hard to make it work. Like using chiropractic manipulation for a ruptured disk, instead of surgery, when it works, it’s less invasive and painful—but it has a lower guarantee of working.

You don’t need anyone to conduct debt settlement negotiations for you—nothing prevents you from contacting your creditors directly. Having a professional help you can increase your odds of success, though be wary of debt settlement companies—many charge very high fees and also take a “hardball” stance to negotiating that can result in you being declared in default. A good idea is to work with a bankruptcy attorney. A bankruptcy lawyer can try to negotiate with your creditors, if that’s appropriate—and if it’s not, or it doesn’t work, he or she can then help you declare bankruptcy.

Talk to a Bankruptcy Lawyer to find out whether debt settlement or bankruptcy is a better option for your situation.