What exactly is the difference between debt settlement and bankruptcy?
The simple answer is that debt settlement is an out-of-court voluntary arrangement between a debtor and creditors. Bankruptcy is a legal proceeding in federal court that can result in an order by a judge discharging liability.
A successful bankruptcy filing results in a court order giving the debtor a “discharge” of debt. Court orders can be enforced against creditors. Generally, there are two types of bankruptcies for consumers, Chapter 7 and Chapter 13. Chapter 7 eliminates debt. Chapter 13 restructures debt into a repayment plan based on what the debtor can afford to pay, not necessarily on what is owed to the creditors. Bankruptcy laws are powerful because they protect the debtor from collection proceedings even when a creditor isn’t interested in making a deal.
A debt settlement is an out-of-court voluntary negotiation process between the debtor and creditors. A debt settlement company, generally, is an agent for the debtor that works out some sort of settlement or repayment plan that is acceptable to one or all of the debtor’s creditors. Debt settlements do not offer the same protections and level of relief as a bankruptcy. There is no court order that can be enforced. There might be a contract that could be enforced, but not always and the contract usually is full of ways for a creditor to back out of the deal. For a debt settlement to work, creditors must agree to accept the settlement or proposed payment terms.
A debt settlement is reported to a credit bureau, as is bankruptcy. Bankruptcy, however, can remain on the report for up to 10 years, whereas debt negotiations or settlements are only reported for 7 years. However, both options adversely impact credit scores. In fact, if you are in the unfortunate position of having to consider one of these options, your credit score is probably on its way down anyway.
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