Debt settlement doesn’t require a court filing and — unlike bankruptcy — can often be handled without a lawyer or financial counselling. A settlement is a deal you negotiate with creditors to pay less than the amount owed, usually with a lump-sum payment

OK, so why would creditors want to settle your debts for less than you owe?

Because they know you can always file for bankruptcy, which could eliminate their ability to collect anything from you. So, they are often willing to accept less than what is owed through debt settlement.

If you conclude that you can’t afford even the reduced payment negotiated from debt settlement, bankruptcy could be the best option.


Bankruptcy comes in two varieties: is essentially a payment plan that takes 3 to 5 years clears your unsecured personal debts in 6-8 months but comes with potential pitfalls. If you own a home, you will be able to keep it under though you will need to make mortgage payments after you exit bankruptcy court, you can keep your home if you don’t have much equity in it and you stay current on payments

If you have significant equity, your home might qualify as exempt in some states, but other states allow bankruptcy trustees to sell your home to raise money to repay creditors. also requires you make less than your state’s median income (half salaries above the number, half below) for a family your size.

Bankruptcy frees you from debt collection, but the headaches can linger for years. Debt settlement without bankruptcy can take more time but — if negotiated properly —  can do less damage to your credit. Debt settlement stays on your credit report for seven years but has less negative impact on your credit score.

Advantages and Disadvantages of Debt Settlement

Advantages and Disadvantages of Debt Settlement

Debt settlement can be the best way out of a financial mess, but it is full of pitfalls, and the Consumer Financial Protection Bureau warns: “Debt settlement may well leave you deeper in debt than you were when you started.” Now there’s a sobering thought.

The biggest problem is convincing a creditor, or multiple creditors, to accept less than they are owed. Creditors aren’t obligated to enter a settlement agreement, but many are willing if they believe you can’t pay and otherwise will file for bankruptcy protection. If that happens, it means they receive little or nothing.

Some people hire a debt settlement firm to represent them; others negotiate themselves. The advantage to contracting with a debt settlor is saving time and avoiding the hassle of negotiating yourself. But the CFPB warns: “Dealing with debt settlement companies can be risky.”

If you decide to pursue debt settlement on your own, it’s vitally important you educate yourself on the details of the debt that you owe, develop a realistic plan on how much you can save each month based on your current financial situation, and negotiate with creditors or collectors with a sensible repayment plan that they will agree to in writing.

Advantages and Disadvantages of Bankruptcy

Bankruptcy are the two avenues individuals can use to clear their debts through the courts. Eliminates your debts, but in some states,  it might require you to liquidate all you own, including your car and house, to help compensate your creditors.

It protects your home from foreclosure but requires that you partially repay creditors over a 3-5-year period. Because it requires repayment, it is often called “wage earner’s bankruptcy.”

Both chapters will cause long-lasting damage to your credit report. In addition, student loan debt, income taxes and child support payments can’t be discharged in bankruptcy, so you will still be obligated to repay them

Debt Settlement vs. Bankruptcy: Which Is Better?

If everyone in debt found themselves in the same predicament, there might be a blanket answer to this question. Of course, that’s not the case, and where debt settlement may be the right option in one situation, bankruptcy might be preferable in another. And in a third scenario, neither may be the best solution.

The bad news is that resolving serious debt woes is not a one-size-fits-all proposition. The good news is that there are many potential routes out of debt, and a non-profit credit counsellor such as the ones at In Charge Debt Solutions are well-equipped to help point you in the right direction — whether it be debt settlement, bankruptcy, or other debt relief options such as debt consolidation.


Before choosing a particular option, speak with a credit counsellor at In Charge, who can evaluate your specific situation and discuss the pros and cons that each potential solution offers.

If bankruptcy is ultimately determined the best option for escaping your debt crisis, In Charge Debt Solutions offers bankruptcy education classes that allow you to complete the credit counselling and debtor education requirements for entering and exiting bankruptcy. The classes, which include online instruction and a personal counselling session via telephone, provide advice on your current financial situation and instruction on money management, budgeting and how to develop and stick to a plan that will lead to a brighter financial future.