Deciding whether bankruptcy or debt settlement is better for your credit score likely means that you have a significant amount of debt and you are weighing your options moving forward. Some consumers will continue to pay minimums on their debts, while the debt balances continue to rise thinking this is their best way forward while living in fear that their credit score will be affected If a bankruptcy is filed.
A credit score is important, no doubt. A high credit score allows consumers to qualify for the best rates on home and auto loans while also qualifying for the best credit cards, often times offering the best rewards for using the cards. This could be the difference in saving thousands of dollars of the years. Those who know how to work the credit system benefit and get further ahead, while those who do not educate themselves fall further behind and do not seek a solution to turn things around to work on their credit and in turn save thousands of dollars over a lifetime. I had the chance to discuss whether bankruptcy or debt settlement is better for your credit score on 1150AM KKNW and you can listen to that show here:
Will Filing Bankruptcy Lower My credit?
The short answer is it depends on your current situation. The long answer is yes if you have excellent credit (700’s or above) and file for bankruptcy, your credit score will go down. On the flip side, if you have an awful credit (500’s or less) its likely your credit score will go up after filing bankruptcy. When I am preparing a bankruptcy case, I obtain a credit report that predicts where a debtor will be 12 months after the filing of their case, so I have seen the numbers all over the place, but on average based on what I have seen, most people end up in the 600’s post-bankruptcy filing and can work on their credit from there. In fact, most consumers can qualify for a home loan after about 2 years from the filing of a chapter 7 bankruptcy case or immediately after a chapter 13 plan is completed and can get auto loans right away. A bankruptcy can stay on a credit report for up to 10 years as a public record, but it’s effects on your credit score likely only linger for about 2 years.
If My Credit Score Will Go Down, Should I not File Bankruptcy?
For most people, if you are thinking about filing bankruptcy, then you should not let the affects on your credit score stop you as the benefits can far outweigh any short term affect on a credit score. In fact, as discussed above, a credit score can improve simply by clearing debts on credit lines that have been maxed out. Even if your credit score goes down, it is something you can bounce back from fairly quickly.
Will Debt Settlement Lower My Credit Score?
Yes! No matter what you hear or some salesperson tells you from a national debt settlement or consolidation company, debt settlement will harm your credit, likely more than a bankruptcy filing would, and it can take longer to bounce back from. This is because to obtain a favorable settlement you must be delinquent in most cases, otherwise the creditor believes you can make the full payment.
If you are current on your debt payments or making minimum payments you will need to go delinquent, likely at least 6 months, before your accounts will start to be charged off and sold or transferred to third party debt collectors with whom you may be able to negotiate favorable settlements. These settlements can vary depending on the type of debt and the age but around 50% of the full balance is about average and you may also incur a tax bill for any debt forgiven over $600 or more. By the time you settle the debt, you will have at least 6 months delinquencies reporting on your credit which will not be removed upon settlement. The settled account will be updated to settled for less than the full balance most likely on your credit report and the reporting and late payments can stay on your credit for up to 7 years after you made the settlement payment.
Of course, if you were already late on your payments when you sought out debt settlement, the damage has already been done to your credit scores, but paying on charged off debt can actually lower your scores further and cause the debts to report for a longer period of time, 7 years from when you pay on the debt.
Can I ask for a Pay for Deletion?
You could ask the creditor for a pay for deletion, but this is typically not an option a creditor will allow, but when I have seen it done, the creditor or collection company will require a payment of the full balance.
What if I am Sued by a Creditor?
If a lawsuit is filed against you in Washington State, then you have 20 days to file an answer to the lawsuit (in most cases), file bankruptcy or negotiate a settlement. If bankruptcy is not an option, then negotiating the settlement to avoid a judgment may be your best option, even if it will hurt your credit as not only will you have a judgment on your credit report if you default, your bank account and wages could be garnished.
Is Bankruptcy or Debt Settlement Better for a Credit Score?
After discussing the options and different scenarios, I believe debt settlement is much worse for your credit score than filing for bankruptcy for most people. This is because the recovery time and benefits of bankruptcy may outweigh debt settlement for many people. With that said, debt settlement may make sense for many people if they can afford a settlement, don’t qualify for bankruptcy, have a smaller debt to pay etc.
Dealing with debt can feel like a disease that keeps you up at night and just does not go away unless you proactively take steps to get the situation under control. Once of the best ways to do that is to talk to a debt relief professional about your situation and learn about your options.
If you are trying to figure out if bankruptcy or debt settlement is better for your situation, Symmes Law Group can help get you on the right path, so give us a call at 206-682-7975 or contact us to get the counsel you need.