The Credit Effects Of Debt Settlement And Bankruptcy

Debt settlement programs offer a viable, and often preferable, alternative to bankruptcy. In some cases, bankruptcy may be the best option available to a consumer but debt settlement provides a way of repaying unsettled debts, reducing those total debts, and becoming debt free within three years or less. Bankruptcy should never be looked on as being an easy way to eliminate debt because it carries serious negative side effects on your credit rating, emotions, and personal circumstances.

Bankruptcy Types

There are two types of individual bankruptcy claims that can be filed – chapter 7 and chapter 13. Chapter 13 bankruptcy requires that you use all of your income, after the courts have calculated an average living allowance, to repay some or all of your debt over a period of three to five years. Chapter 7 bankruptcy is the most extreme and requires liquidation of assets and the proceeds of this liquidation is used to repay a portion of your debt.

Bankruptcy And Credit History

Regardless of the type of bankruptcy you file, it will remain on your credit history for 7 years in the case of chapter 13 and 10 years for chapter 7 bankruptcy. This will make it very difficult, or even impossible, to gain any credit during that time. Even though chapter 13 bankruptcy is looked on in a better light to chapter 7, the typical consumer will still have serious problems gaining any form of credit during this period.

Future Employment

There are further problems you should consider that are not directly related to your credit score but will have a major impact on your life. When applying for jobs you will be required to declare any bankruptcies you have filed and a potential employer can refuse your application based on this information. You may, therefore, find it difficult to get a new job in the future although some employers will still employ you even with a bankruptcy against your name.

Debt Settlement Programs

Debt settlement programs will impact on your credit history in some way. If you currently have a good credit rating, and are meeting your regular repayments, then enrolling in a debt settlement program will have a negative effect – your credit rating will get worse. The likelihood of a consumer enrolling in debt settlement when they have good credit rating, though, is low.

If your credit rating has already been hit because of late or missed payments and you frequently default on payments then debt settlement is unlikely to have a negative impact on your credit rating. Once you start making the new renegotiated repayments, your credit rating may actually improve.

Default Payments

When you initially start a debt settlement program you willingly cease making payments to creditors while the debt settlement company negotiates on your behalf. This obviously leads to default payments. However, a good debt settlement company will also ensure that once a renegotiated debt figure is fully repaid, the lender will report that your debt has been paid in full. This is reported to the credit agencies and marked against your credit rating – often seen as a positive mark compared to the alternatives.

Once a debt settlement program is complete, those that had poor negative rating should be on their way to rebuilding a reasonable credit score and being able to apply for new lines of credit such as mortgages and car loans. In contrast to the seven to ten years minimum that it will take to start rebuilding your credit score after bankruptcy this is a much shorter period.