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Debt Settlement vs. Bankruptcy: Insight From Credit Help in Dallas

  • By Credit Diva of Dallas
  • 16 Jul, 2020

Reducing debt can leave you with less-than-ideal options to recover. Ignoring debt can continue ruining your credit—and opportunities for a much-needed car loan or a new job in Dallas following COVID-19!

When choosing between debt settlement and bankruptcy, is there a better option? How does each situation affect your credit? When you already know you need credit help in Dallas, how you manage your debt is a crucial decision. 

If debt collectors are calling, it's time to consider credit repair! Repairing your credit involves reducing your debt, but it's essential to know how debt settlement affects your credit compared to something like bankruptcy.

What Is Debt Settlement?

When you have an overwhelming amount of debt, requesting a settlement can reduce the amount you owe a creditor. While paying less to absolve what you owe on a credit card probably sounds great, make sure you understand what you're getting into! At Credit Diva of Dallas, we always emphasize the importance of education as a form of your personal power.

  • To fulfill a debt settlement, a creditor must agree to accept payment that's less than the full amount owed.
  • If they agree to your offer of a lower amount, they also agree to discontinue requests for the total amount.
  • They also can't sue you over the debt. 

In most cases, the amount you owe is so significant that the creditor realizes you'll never be able to pay it off in full. Settling for a lower amount means they recover "some" money while getting your debt off of their books. 

Serious black businesswoman on phone at deskHow Does Debt Settlement Affect My Credit?

Before you determine that paying less for a settlement is a "win" for you, weigh the consequences. A debt settlement can: 

  • Destroy your credit: If you already have a low score, you're adding time and difficulty to your road to recovery
  • Take between two to four years to reach a settlement: During that time, you could continue to accrue fees.
  • Be expensive: Finding the right credit help to negotiate with a creditor can be costly. 

Debt settlement also stays on your credit report for seven years. That's less time than a Chapter 7 bankruptcy—but still a significant obstacle in your credit history for a long time. However, if you can't qualify for bankruptcy, debt settlement might be your only option to reduce your debt.

What Is Bankruptcy?

When filing bankruptcy, you won't repay your debt directly to creditors. However, you lose property and assets in exchange for eliminating your debt. 

  • A federal court appoints a trustee to oversee the sale of any assets that qualify as collateral.
  • Your appointee uses the money from the sale to pay your creditors.
  • In many cases, the sale of your assets isn't enough to fully repay creditors even after the bankruptcy is discharged. 

How Does Bankruptcy Affect My Credit?

Like a debt settlement, bankruptcy damages your credit. You'll find a bankruptcy listed with the negative information on your credit report. With a bankruptcy on your report, your credit score drops. 

It's tough to overcome the limitations of a bankruptcy on your credit report: a Chapter 7 bankruptcy stays on your credit for ten years. Lenders and creditors might find it difficult to approve you for a car or a Dallas home loan during that time. This is even more relevant now as lenders have tightened their lending requirements in the wake of COVID-19.

African woman working on laptopGet Help Understanding Your Options!

Neither situation is an ideal solution, but working to have good credit is critical. Sometimes that means starting over with a debt elimination solution and rebuilding a better credit report with a clean slate. 

Your circumstances can determine if debt settlement or bankruptcy is the better option for you, but the best way to get an idea of this is to reach out to your Divas. When searching for credit help in Dallas, you can't afford to choose anything less than a professional credit repair company. However, this company should also be dedicated to your continued financial education—just like your Divas here at the Credit Diva of Dallas!

When you're ready to take your power back, reach out to us for a consultation so we can guide you forward!

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