Debt settlement negotiates a reduced payoff with creditors, while bankruptcy is a court process that discharges or restructures debt. Both damage your credit and are generally last-resort strategies when you owe more than you can realistically repay. Debt settlement may be the better path if you can afford some payments toward your debt.
Bankruptcy, however, could make sense if your debts are more than what you can feasibly afford or you're facing lawsuits from your creditors. Understanding how debt settlement and bankruptcy work, along with their pros and cons, can help you determine which form of debt relief better suits your situation. Debt settlement involves negotiating a reduced payoff with your creditors.
If your creditor agrees, you'll send off a lump-sum payment for less than what you owe to settle the debt. Debt settlement is most commonly used for unsecured debts, such as credit cards, personal loans, and medical bills. If you owe $10,000 on a credit card, for instance, your creditor may agree to accept $7,000 to resolve the account.
In this case, the remaining $3,000 would be forgiven. Rather than pay a lump sum, you may instead arrange a term settlement. This involves making several payments over a set period of time until the agreed amount is settled.
Settling your debts can take two to four years, and comes with risks such as damaged credit. You may be able to settle a debt for as little as 50% of what you owe, but success isn't guaranteed. Debt settlement works in one of two ways: You can contact your creditors directly or hire a debt settlement company to negotiate on your behalf.
Debt settlement companies often charge fees of 15% to 25% of your enrolled debt. But they have expertise in this area and can communicate with creditors, so you don't have to. If you're comfortable handling negotiations on your own, you could opt for DIY debt settlement and save money on fees.
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