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Debt Settlement vs. Bankruptcy

While it can be easy to weigh the pros and cons of debt settlement vs. bankruptcy and make a decision, the truth is that they are two very different options that will likely require you to follow drastically different paths if either is pursued. Debt settlement companies are not held to the same level of accountability as creditors, meaning that they have no obligation to provide a good product or simply give you what you pay for. There also aren’t many regulations in place for these companies, which means that debt settlement is virtually unregulated.

The goal of a debt settlement company is to negotiate a settlement with your creditors for less than what you owe, then take a percentage of the money you put toward the settlement and use it to continue negotiating with other creditors. Most debt relief companies advertise that they can settle your debts for as little as 10% of the total, but this is probably not what’s going to happen. In most cases, you’re going to pay far more than your minimum payments each month and still be saddled with debts in excess of what you originally owed.

Differences Between Debt Settlement & Bankruptcy:

In order to qualify for a debt settlement, you have filed for bankruptcy in the past or have been denied bankruptcy. Although they might seem similar, they are very different processes and companies. “Debt settlement” companies are not held to the same level of accountability as a creditor and aren’t legally required to be fair or make good on their promises. While negotiating with creditors to lower the debt you owe and paying them less than the amount owed, debt settlement firms will often collect a percentage of your monthly payments. The end result is that your balances are reduced, but you still owe more than what you originally owed.

The other option is full Bankruptcy – Debt Negotiation, where all debts will be eliminated. Bankruptcy requires the creation of a formal repayment plan known as a “debtor’s plan” that pays back creditors over time. The debts you have will be eliminated, and you won’t owe anything. Bankruptcy is a better option than debt settlement because it will eliminate your debts and prevent them from incurring additional interest. You’ll also be free from some of the restrictions that bankruptcy places on you, allowing you to operate your business or buy a home in the future. Bankruptcy requires legal representation and the creation of a formal repayment plan to pay back creditors over time.

 When to Consider Debt Settlement or Bankruptcy:

Debt settlement vs. bankruptcy is a choice that every consumer has to make when they decide that their debt is too much for them to handle. If you’ve racked up so much debt that you don’t know how you’re ever going to repay it, then the two options outlined here are likely your best option. There are many different companies out there offering debt settlement and bankruptcy options, but you should be cautious about which one you choose and trust. You might have questions or concerns that you’re not able to answer on your own, so it’s a good idea to talk to an attorney before taking any action.

Of course, there are other situations where it doesn’t make sense to pursue either option, and it might be better for you to seek professional advice and counseling. Most consumers can simply qualify for debt settlement, but if you’ve never filed for bankruptcy and are carrying high balances, then this is probably not the best option for you. The other situations where you might not want to pursue either of these options are those where you don’t have such high balances, the debt is newer and hasn’t been around long enough to accrue bad interest, or the interest rates are low. For these cases, it may be better to just make additional payments on a monthly basis.

Impact of Bankruptcy and Debt Settlement on Credit:

Debt settlement and bankruptcy can have a substantial impact on your credit score, depending on which option you choose. If you want to retrieve your current credit score, then you should avoid debt settlement companies because they are not held to the same credit standard as creditors, meaning that this is a major factor in lowering your scores. This means that the debt relief company will be able to negotiate a much lower amount with creditors, but it won’t make up for what it doesn’t get from the consumer. You’ll likely have to pay much more each month and be stuck with the debt.


Debt settlement and bankruptcy are two different options for dealing with financial stress, but they come with a lot of differences between them. In most situations, it’s a good idea to seek the services of an attorney if you’re considering either one. The first thing you have to consider is whether or not your creditors will be willing to negotiate a settlement with you. If they won’t, then you should explore other alternatives, such as debt consolidation and debt relief.