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Debt Consolidation Versus Debt Settlement

Why Debt Settlement is Better than Bankruptcy

Debt settlement, also known as debt arbitration, debt negotiation, debt workout and other names, can help a debtor who is drowning in unsecured debt. Unsecure debt includes credit cards, department store cards, medical bills, signature loans and other credit extended that is not secured by any collateral (e.g., a house or car). Many people are skeptical about debt settlement as a bankruptcy alternative because they wonder why a creditor would accept less money than what is owed to them. Others are concerned about whether or not debt settlement is legal. Trust me, it is legal. See our article, " Is Debt Settlement Legal? " for more information.

Creditors will typically accept a settlement, and you may be debt-free faster by negotiating.
Believe it or not, creditors will accept less than what you owe if they feel it's in their best interest to do so. A creditor will accept a debt settlement of anywhere from 30% to up to 60% if they feel the person requesting the debt settlement is a legitimate candidate for bankruptcy. They'll easily be able to determine this by a quick review of your credit report. If they see that you are delinquent not only on their account, but also others, they'll likely be inclined to accept a settlement. They'll also be open to negotiation if they determine that you have few, if any assets, to protect (e.g., a house or car). Another way they'll determine it's best to accept a negotiation is if they find that you are unemployed or have a job where you make significantly less than what you used to make.

The benefit here is that you'll get the debt relief you need without having to declare bankruptcy. The harassing phone calls and letters will stop, and you will be debt-free. It will probably take less time to settle your debts than it will to go through the bankruptcy process. And, you don't necessarily have to get an attorney involved in the process. It is possible to negotiate with your creditors yourself. But, if you're not comfortable with that, get a professional to represent you. The professional may even be able to work out a better deal because they are generally more familiar with the creditor's internal process of debt settlement than you are. And, they generally know who specifically to contact for negotiation.

The effect on your credit scores may not be as bad as you think if you negotiate your debts.
If you're looking to negotiate debt, and the creditor is seriously considering your offer, chances are your credit is already bad. So, a successful debt negotiation may actually improve your scores. They won't be good, but they certainly won't be as bad, because the debt is paid and it's no longer reflecting on your debt-to-income ratio (about 30% of your credit score according to myFICO.com). It will only devastate your credit if you have good credit to start with. And, either way, the damage is not as extensive or as long lasting as the damage inflicted by bankruptcy. Plus, there is no public record generated against you when you do a debt settlement. The only implication to your credit is that the creditor will report that the debt was settled for less than what you owed. And, that will not last any more than 7 years, as opposed to derogatory reporting that would stay on your reports for up to 10 years if you file for bankruptcy. The effect on your credit report is one of the major benefits of debt settlement over bankruptcy.

Debt settlement looks better to anyone who pulls your credit reports than bankruptcy.
Another plus in your column if you choose debt settlement over bankruptcy is that you've actually taken positive action to take care of your debt problem. Your credit isn't only pulled by existing and potential creditors. An increasing number of potential employers are also pulling credit reports on job candidates, especially if you're applying for any sort of government job or a job requiring a government or confidential clearance. During the background investigation part of the interview process, the prospective employer will ask questions about your credit report. When you explain that you hit a rough patch financially and that you had to settle some of your credit accounts as a result of it, it looks better to the prospective employer than if you had filed for bankruptcy. It shows that you took positive action to remedy your financial situation, especially if you've since built a positive payment history on your remaining credit. I know this from personal experience.

I applied for a county government job early this year, and because I settled the old debts, the detectives in charge of my background investigation were sympathetic and complimented me on the fact that I did what I could to resolve the problem rather than filing for bankruptcy. I also have passed bank background investigations as a result of my settling the debts rather than filing for bankruptcy-I had done computer desktop support for a couple of banks, which made the background investigations necessary.

Potential landlords and insurance carriers also will pull your credit to determine what kind of risk you will be. And, similar to potential employers, landlords, insurance carriers and other entities that pull up your credit reports prefer to see debt settlements than bankruptcy for the same reason: it shows you took positive action to resolve the debt problem instead of giving up and making the creditors take a total loss on your debt. Once again, I personally experienced this. My current landlord commented that he appreciated that I settled my debts rather than filing for bankruptcy. And, some landlords won't accept rental applications from people who've recently filed for bankruptcy. I've known people in this situation, and it's not a good situation to be in.

In Conclusion
In many cases debt settlement is a much better alternative than bankruptcy. Potential creditors, landlords, insurance carriers, employers and other entities that pull your credit report prefer to see a settlement than a bankruptcy because it shows them that you took responsibility for the problem and solved it in the best way that you could. It looks especially good when you've since built a positive payment history. Debt settlement should be considered as a last resort before bankruptcy. While it's generally a better option than bankruptcy, there are times where bankruptcy is the only option including when you're in a foreclosure and you want to file chapter 13 bankruptcy to stop the foreclosure or when you have more secured debt than unsecured debt. If you are overwhelmed with debt, contact us immediately ! We'll go over your options and help you determine what is best for your financial situation.