Bankruptcy vs Debt Management

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Some people prefer to negotiate settlements with their creditors either through a debt management company or on their own. Their goal is to avoid what they consider to be the absolute worst option: bankruptcy. However, a bankruptcy provides some benefits that are not available in debt settlement.

When a debtor files bankruptcy, there is an automatic stay that becomes effective. Creditors must immediately stop all collection activity against the debtor. Creditors must stop sending collection letters and statements, garnishing wages, and contacting debtors on the phone. If a lawsuit is in process, the lawsuit must be closed with the court. As a result of the automatic stay, debtors get relief from creditors.

With debt management, interest rates are typically negotiated with creditors to reduce the monthly payments. However, there’s nothing that absolutely prevents creditors from contacting debtors. To make matters worse, there are some fraudulent debt management companies that take money, but don’t do anything to settle the debt.

Both bankruptcy and debt settlement are reported on credit reports. Bankruptcy can be reported for up to ten years, but that doesn’t mean that it will take ten years to improve a credit score. Also, debt eliminated in a bankruptcy doesn’t count as income for tax purposes while settled debt may count as income.

As shown above, bankruptcy is not always the worst option in the world. There are benefits that are not available with other options.