Debt Settlement vs. Bankruptcy

If you are over your head in finances and not sure what to do, consider debt consolidation before you consider bankruptcy. By declaring bankruptcy, you are setting yourself up for 7-10 years of credit report nightmares that will stick to you in a very bad way. Although credit consolidation will also leave some negative marks on your credit report, these negative factors are weighted less against your credit score than bankruptcy. 

Declaring bankruptcy means that you aren't able to pay back on your debt obligations, leaving creditors without a chance to recoup much of what they lent to you. Your credit scores for bankruptcy will be lowered to the sub 500's or even the 400's. Consolidation will also leave some negative marks on your credit rating, but you could still have a significantly higher credit score because you are still paying most of your debt back.

The consolidation process gathers all of your debts and combines them into one bill. Consolidation companies will work with your debtors to pay them out according to a schedule. They will even work to negotiate the removal of some of your late fees and reduce your interest rates. Your creditors will get paid, although it may not be on the ideal payment schedule.

Your credit report may reflect marks such as "paid for less than the full amount" or "over the limit/late, but account current." Although these marks hurt your score, it is minimal compared to defaulting on your credit card and not paying anything at all. What's even worse is when you have a bankruptcy written across your credit report. Defaults and bankruptcies will sit on your credit report 7-10 years depending on what state you live in.

The debt consolidation process will cost you some money. Many companies will require a small fee upfront to begin contacting your creditors and gather up the total debts. You will then put money into a monthly account which the consolidation company will then use to pay your creditors. Some of your creditors may be paid in monthly payments, others will negotiate a deal for less than the balance if given a lump sum of money. The consolidation company will usually charge a percentage of your negotiated savings as their fee and deduct this from your account. The process could take a long time to complete, but you will be debt free in the end.

Before you consider bankruptcy, do some research and see what consolidating your debts can do for you.