Benefits of Debt Settlement

• Settling accounts often does less damage than a bankruptcy on your credit report. For example, if you had a score of 680, bankruptcy takes 130 to 150 points off of your credit rating, while a single settled account does just 45 to 65 points in damage, according to Ellen Cannon of the Bankrate website. Because debt settlement is a private agreement, you can negotiate this within days or weeks, while filing bankruptcy usually takes four months. Also, paying something may preserve your relationship with a creditor you want to keep, such as a medical provider, that you may lose if you discharge the debt in bankruptcy.
  
  

Benefits of Bankruptcy

• Bankruptcy gives you a fresh start by eliminating most of you unsecured debts. If you file Chapter 13, you make payments to creditors based on your income and then the court discharges the rest of your unsecured debt after completing the plan. If money is of the utmost importance and you can wait a few years for your credit score to recover, bankruptcy is the cheapest option.
  
  

Disadvantages of Debt Settlement

• If your lender forgives more than $600 in debt, it must file a 1099-C form for canceled debt. Thus, you will have to pay income taxes on the canceled debt like income from a job. The creditor may not settle for pennies on the dollar. If you owe a significant sum -- usually more than $10,000 -- the creditor does better just to sue you. Also, you have to come up with thousands upfront, which you probably would have used to make minimum payments if you had it.
  
  

Disadvantages of Bankruptcy

• You cannot discharge certain debts in bankruptcy, such as most taxes and student loans. Also, bankruptcy is the worst item you can have on your credit report and probably prevents you from obtaining a mortgage or auto loan for several years. A potential employer that sees a bankruptcy on your record may disqualify from a job for a candidate with a better credit history. And you can file for a Chapter 7 discharge only every eight years, so you may have no way to escape an unmanageable debt burden between then and now.
  
  

Warning

• A bankruptcy case costs a few hundred dollars to file, but most people need a lawyer, which means thousands of dollars in legal fees. Debt settlement companies often charge thousands of dollars, too, but many don't do anything that a consumer can't do on his own. In any case, talk to a credit counselor -- this is a requirement to file bankruptcy. He may offer a viable alternative to settling debt or bankruptcy, such as asking lenders for loan modification.