Bankruptcy or debt settlement which is right for you

Debt settlement vs. bankruptcy: Which is right for you?

When you’re in need of serious help getting your credit back on track, there are two debt relief options that are worth considering. Both debt settlement and bankruptcy will reduce or eliminate your debt, but can also negatively impact your credit in the near term. Here’s what you need to know about both to consider which is right for you.

What is debt settlement?

Debt settlement allows you to negotiate with creditors to pay off debt on delinquent, unsecured credit accounts and personal loans for less than you owe. For example, a person with a $10,000 balance on their credit card might pay $4,000 to close and “settle” the account and have the remaining $6,000 forgiven.

Debt settlement is really only a viable option for people who have reliable income. That’s because you’ll need to make each payment you agree to with creditors over the course of your settlement plan, which for some, can last a couple years. Learn more about the ins and outs of debt settlement.   

What is bankruptcy?

Bankruptcy can give you a fresh start or help you re-organize your debts and pay your creditors less depending on the type of bankruptcy you file. All bankruptcy provides court-ordered protection from creditors, but the type of bankruptcy you file will depend on your personal financial situation. Chapter 7 allows for your debts to be fully discharged, while Chapter 13 provides for an organized repayment plan (there’s also Chapter 11, though it is most often used by businesses).

Related articles:
What’s the difference between Chapter 7 and Chapter 13?
What’s the difference between Chapter 7 and Chapter 11?

Pros & cons: Which option is right for you?


Relief from your debts under Chapter 7 is fast. It’s usually completed within 90 days of filing for bankruptcy protection. Once your case is discharged, you can often apply for new credit cards within just a few months, and you’ll likely qualify for a home loan in two to three years, and federal student loans after three years. Keep in mind you may be required to liquidate some of your assets under Chapter 7. This varies on a state-by-state and case-by-case basis.

And don’t forget that filing bankruptcy impacts your credit for seven to 10 years and will delay your short-term financial goals. That can be especially hard for people who file Chapter 13 and aren’t able to complete their payment schedule. They end up taking the credit hit of filing bankruptcy and then, because they miss their payments, lose the benefits of bankruptcy protection, owing their debts in full again.

Related article: Six steps to rebuild credit after bankruptcy

Bankruptcy carries a stigma for most people, but it can be a very useful financial tool if your situation warrants it.

“Bankruptcy is not the nightmare it’s made out to be by a lot of folks, but it does damage your credit,” Michael Bovee, co-founder of, said. “But the fact is, there’s a time for it. Even if you can do other things to tackle a mounting debt problem, bankruptcy can prove to be the right option.”

Debt settlement

This can be a good debt relief option for people who don’t want to file or don’t qualify for bankruptcy.  Debt settlement is often quick, and plans can be completed in as little as a couple weeks to a couple years, which is significantly less time than the payment schedules under Chapter 13 bankruptcy. And if you choose to do your own negotiations or work with a service that offers reasonable fees, this can be a cost-effective solution and save you a lot of money.

Like bankruptcy, debt settlement has a negative impact on your credit because you can’t even start negotiating with most creditors until you are at least 90 days past due on your account. There also can be tax implications. You may owe taxes on the amount of debt your creditors forgive (while there are no tax implications on debts forgiven or discharged in bankruptcy).

One of the biggest challenges of opting for debt settlement is that it doesn’t provide protection against collections or lawsuits the way bankruptcy does. However, once you complete your settlement payments, you can start rebuilding your credit right away (though you probably won’t qualify for the best interest rates since your credit scores have probably fallen).

Related article: Five steps to rebuild credit after debt settlement

How to decide which is right for you

As you consider debt settlement and bankruptcy, it’s important to take an honest look at the amount of your debt, your budget and your available funds/income. Identify short- and long-term financial goals and how your credit health will impact these.

To assess your qualifications and options for filing bankruptcy, it’s best to speak with a bankruptcy attorney. Most offer a free consultation and you’re under no obligation to file after speaking with them.

If you’d like to consider debt settlement, you can begin by assessing:

  1. Your balances. Some amounts are too small for settlement.
  2. Your creditors. Each company has its own approach to dealing with delinquent accounts and their policies change periodically.
  3. Your cash flow. Do you have the funds to settle all your debts within 18 months or, ideally, 12 months? (This reduces the risk of being sued.)
  4. Your budget. Can you pay your settlements on time and still pay your other bills?
  5. Additional funds. Are there other sources of funds, e.g., something you can sell or loans from family or friends that you can access?

If debt settlement is the right option, you’ll work with a debt settlement company to negotiate on your behalf or you can negotiate directly with each of your creditors.

Resolve recommends SoloSettle

Resolve partners with SoloSuit which provides a debt settlement tool called SoloSettle. If you are being sued for debt, you can use SoloSettle to get it settled quickly.