When you are overwhelmed by debt, you probably have two options available to you. You can agree to a debt settlement with your creditors or you can file for bankruptcy. Both of these options can get you a fresh financial start, but they each have their own pros and cons. One might be a better choice for you depending on your situation. This is why you may want to talk to a Montgomery County bankruptcy lawyer before you make any big decisions.

How Does Debt Settlement Work?

When you pursue a debt settlement, you are telling your creditors that you are willing to pay, but the current debt is too much for you to handle. You want to settle up and pay them a percentage of what you owe.

Usually, a settlement results in the debtor paying around 25% to 80% of their existing debt. If you agree to a debt settlement, you also usually end up paying a fee to a company that helps you negotiate the settlement. Then you also have to pay taxes on any forgiven debt.

Why Would Creditors Agree to a Debt Settlement?

You may be wondering why creditors would even agree to a debt settlement. Don’t they want all of their money back? They do, but they would also rather take something rather than nothing. If you file for bankruptcy, some of your debts can be wiped out completely. The creditor would get nothing, so they would prefer to settle and get a percentage of what is owed to them.

Will a Debt Settlement Affect My Credit?

Unfortunately, agreeing to a debt settlement can damage your credit. Scores can drop 75-100 points, and some people end up seeing even steeper drops. You can rebuild your credit over time though. If you’re really drowning in debt, a settlement can be your best option.

How Long Will a Bankruptcy Stay on My Credit Report?

A bankruptcy can also affect your credit score. In Chapter 7 bankruptcy, you liquidate assets to pay off as much debt as possible and any debt that is eligible to be expunged is cleared from your record. This type of bankruptcy will stay on a credit report for around 10 years. A Chapter 13 bankruptcy, where you make a payment plan for your debts and pay creditors over a three to five-year period, can stay on your report for around seven years.

Are Any Assets Protected in a Bankruptcy or Debt Settlement?

A big difference between these options is that bankruptcy can offer protections for certain assets. Retirement funds are a good example of an asset that cannot usually be touched during bankruptcy. When you settle your debts, there is no such protection. You pay your settlement amount and you may need to pull from retirement savings and other accounts to do so.

Contact Our Bankruptcy Lawyers

If you are considering filing for bankruptcy, don’t try and go it alone. This can be a complex process that requires a lot of paperwork, so contact Mudrick & Zucker to schedule a consultation. We can tell you more about how our lawyers can help you.