Sometimes, despite having some of the best intentions about managing our finances, we still make mistakes that take a toll on our future financial state. Whether our goals and aims have been sidelined due to severe financial hardship or a major illness or a job loss, the fact is that we've simply spent beyond our means and now we've got to suffer for our money mistakes. Are you someone who is saddled with an overwhelmingly large amount of credit card debt and is thinking of filing bankruptcy or repaying a portion of your debt through credit card debt settlement companies? Before you take a plunge into the bankruptcy or debt settlement bandwagon, you should consider the effect of both on your credit score. They say, both debt settlement and bankruptcy have a crucial impact on the credit score of a debtor and therefore you have to decide which one you should go for. Read on to know more.
The options when you’re deep in debt
If you've accrued a pile of unpaid credit card bills and you don’t know where to start from, you should know your options. The two of the most common options that you can take resort to are debt settlement or bankruptcy. Here’s how you can move forward with each option.
Debt settlement: When you choose to settle your debt, you will basically strike a deal with the creditor where he will agree to waive off a certain portion of the total outstanding debt amount and accept a single payment that will be equivalent to the remaining amount. It’s vital to note that although the creditor forgives a portion of your debt amount, the amount that you save is actually taxable. Uncle Sam will tax you at the end of the year and hence you actually don’t get the chance to save the entire amount.
Bankruptcy: Bankruptcy is perhaps the most significant step towards reducing your debts. When you declare bankruptcy, you actually admit that you will never be able to repay your debts and this is why you’re seeking help of the court to wipe off your financial state. When you declare bankruptcy, some or all of your debts will be discharged and thereby will make you free from all your debts.
Bankruptcy and debt settlement - What does it do to your credit?
Both debt settlement and bankruptcy have some drastic consequences on your credit and neither of them are seen as a favorable option for any kind of debt situation. Whenever you take the decision of settling your debts, the damage is already done. At a time when the lender is willing to settle your debts, you will have to already go through a several number of defaults. This will have already hurt your score badly. Nevertheless, the accounts that you've settled will have a bad impact on your credit score and will stay there and will gradually drop off within 7 years.
On the other hand, bankruptcy will dramatically affect your credit score for the next few years as this represents total inability to pay back your debts and this is viewed negatively by your creditors. Bankruptcies usually take 7-10 years to fall off your report and therefore this becomes a major challenge.
While you’re going through a rough financial patch, you should learn from your mistakes and never repeat them. Whether it’s bankruptcy or debt settlement, both will have a negative impact on your credit score but rather than bankruptcy, debt settlement will certainly be a better option.For more information you can visit our Google + page