If you are looking to get out of debt, it may be in your best interest to file for bankruptcy or seek a debt settlement. The amount that you owe to creditors, your income and the type of debts that you have will typically determine which option is best for you.

Benefits of seeking a debt settlement

One of the key benefits to a debt settlement is that you may be able to resolve an outstanding debt balance for a fraction of what you owe. Furthermore, it may be possible to negotiate a payment plan on your own without the need to hire an attorney or spend time in court. In most cases, a debt settlement is better for your credit score than a bankruptcy. However, this assumes that you continue to make payments while negotiating alternate payment arrangements.

Benefits of filing for bankruptcy

If you are eligible for Chapter 7 bankruptcy protection, your case can be completed in about six months. Furthermore, creditors are generally prohibited from sending any unpaid balances to collections. In a Chapter 13 case, you can typically keep your property and avoid paying taxes on any debt balances that are forgiven at the end of the repayment period. Filing for either type of bankruptcy may be your only option if a debt settlement offer is rejected or you can’t keep up with plan payments.

Don’t dip into your savings to pay off debt

It is generally not a good idea to use funds in a retirement account to pay your existing debts. This is because you could miss out on compound growth in future years and decades. In addition, money inside of a 401(k) or IRA is protected in a bankruptcy proceeding.

While a bankruptcy may hurt your credit score temporarily, it may also help you build a stronger financial future. An attorney may explain the potential benefits of filing such as obtaining an automatic stay of creditor collection activities.