6 Key Considerations When Choosing Between Debt Settlement and Bankruptcy


If you want to know the ways out of debt, you will need to know what your options are in order to hold your creditors at bay and avoid a situation where you lose your possessions in order to settle your debts.

Both debt settlement and bankruptcy have consequences to your credit worthiness, but sometimes these options may be your only alternative if you want to find a resolution to the financial burden that is weighing you down.

Below are some considerations that you need to keep in mind as you contemplate whether bankruptcy or debt settlement is the better option for you.

  1. The first step is acceptance

First of all, you need to come to terms with your real financial situation. If you have not fully realized and accepted your financial situation then you will go through a very difficult time psychologically when this dawns on you.

When you go through bankruptcy proceedings, the court usually appoints an official to take inventory of your assets. The court appointed official will then come up with a schedule of how creditors can be partially paid what is due to them.

  1. Tax on payments

With debt settlement, you will need to find out if you still need to pay taxes on the amount that has been forgiven by your creditors. Usually, the forgiven amount is taxable. With bankruptcy, you have to declare all your debts but you may not be liable to pay any taxes for debt amounts not paid.

  1. Can you handle court?

Debt settlement is handled out of court but bankruptcy proceedings are handled in court. The court helps in handle all the paper work carefully.

  1. Do you want to keep your assets?

When you are declared bankrupt, a court appointed officer will determine a schedule that will be used to partially settle your debts.

The source of these funds will be liquidating your assets in order to settle some of your immediate debts. The first items usually sought after are your house and car.

With debt settlement however, you may not be forced to liquidate your assets.

  1. What about your secured debt?

Whether you opt for bankruptcy or debt settlement, there are some debts that you cannot get away from. These include secured loans and other court ordered debts such as child support, student loans or alimony.

  1. Do you have other options apart from bankruptcy or settlement?

Before you consider debt settlement or bankruptcy, ensure that you are all out of options. This is because the repercussions of these two options will have effects that could follow you for a very long time. You should consider debt management, debt consolidation or any other option, if they are available to you. If you know how to get out of debt, then settlement is a good option.

Remember that if making this choice is too difficult or confusing, you could get help from a debt counselor that will help you decide what your next step should be. You will be surprised at how a counselor will look at your issue so differently from how you look at it. It also helps knowing that you have someone you can share the challenges you are facing.


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