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When people get over their heads in debt and can’t meet their payments, there are two last resort options to consider: debt settlement and bankruptcy. Each one of these processes has its own benefits and disadvantages, and each one is best used in certain situations. This guide will compare the two and then help you understand when each one is the better choice for resolving your outstanding debts.

Understanding Debt

Before we compare debt settlements and bankruptcy, it’s important to understand how debt operates. There are different kinds of debt and there are different laws and regulations governing them. This means that part of the answer to debt settlement or bankruptcy being a better option involves understanding the kinds of debt you have.

For example, companies aren’t obligated to accept a debt settlement, so if your lenders refuse to accept a settlement, then bankruptcy might be the only option. In the same way, there are some debts that can’t be discharged in bankruptcy, like student loans. If these sorts of debts make up the majority of your balance, then bankruptcy isn’t going to improve your situation very much.

Debt Settlement

Debt Settlement is a process where your creditors agree to accept a lower amount of money than your debt is worth. This usually comes in the form of a lump payment. Most people require the help of a lawyer or debt settlement company in order to get the best results, and some companies aren’t willing to negotiate a settlement. Moreover, companies are in the business of making money, so it’s unlikely that you’ll be able to settle for substantially less than you owe. Finally, it can be difficult to have a lump sum payment ready for the settlement, due to different restrictions that are placed on that money and how it can be accumulated.


In bankruptcy, your debts are discharged and your assets are divided among your various creditors. Unlike settlement, bankruptcy doesn’t require you to pay back most or even some of what you owe. Bankruptcy can be expensive though, as it has to go through a court and thus requires the services of a lawyer. You can still save money overall, however, depending on the nature of the debt that you are having problems with. Bankruptcy will have a severely negative impact on your credit score, and will make it difficult to obtain financing on loans or to qualify for credit for a long time.

Best Uses for Debt Settlement and Bankruptcy

Debt settlement and bankruptcy each have different uses and applications. The first thing to consider is what kind of debt you have. If you have debts that can’t be discharged in bankruptcy, the settling is a better option. Moreover, if you only have debts with one lender rather than multiple lenders, you’ll potentially get more mileage and less of a credit hit from settlement instead of bankruptcy. Finally, settlement is a good option for individuals who have access to funds to make a settlement, but don’t have access to funds to cover their regular payments.

Bankruptcy is a better option in many situations when compared to debt settlement. Bankruptcy might take some time, but so does debt settlement. Moreover the fees for bankruptcy will probably be higher, but you can still have a larger net savings because your debts will be discharged in their entirety. Additionally, bankruptcy applies to all of your lenders, and is a court-governed process, which means that you’ll have the backing of the legal system. Debt settlements have to be worked out with individual creditors and is the same thing as a business transaction, which means that it doesn’t have the same sort of oversight and regulation that bankruptcy has.

As you can see, there are situations where bankruptcy is better and there are situations when settlement is the best option. You should talk to a certified financial planner or advisor to determine whether debt settlement or bankruptcy are advisable given your particular situation. It’s also important to note that there are some other options such as consolidation and forbearance that you can use to help resolve your outstanding debts. Use this information to have a better idea of what your options are as a consumer and make the best debt resolution decisions you can.