Debt Settlement vs. Bankruptcy—Pros and Cons

By Aaron Sarentino Reviewed by Minh Tong Updated Feb 07, 2022
Debt Settlement vs. Bankruptcy—Pros and Cons

Filing for bankruptcy can often seem like the easier way out of unpayable debt. However, it has severe, long-term effects that are almost impossible to correct. Debt settlement, on the other hand, can be a more optimal solution for many—read on to find out the pros and cons of each option.

Debt settlement vs. Bankruptcy

First, let’s briefly touch on each term to fully understand what they stand for.

Bankruptcy is a legal proceeding carried out to allow individuals or businesses freedom from their debts, while simultaneously providing creditors an opportunity for repayment. While fully freeing a person, or entity from debt, bankruptcy leaves a mark on records that is close to indelible, even many years after the occasion.

Debt settlement, on the other hand, is essentially a course of negotiations done by professionals on behalf of a client with their creditors to partially relieve the owed amount at hand. While the outcome may vary, the relieved debt can reach up to half of the total outstanding balance. 

Now that everyone’s on the same page, let’s look at which solution you should actually choose. 

Bankruptcy: Pros and Cons

When it comes to filing for bankruptcy, a definite advantage is that it deletes almost all related outstanding debt, except government obligations, student loans, and child support and alimony obligations. That is, of course, if you file for liquidation bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. This type is one of the most common of all for most individuals, along with Chapter 13’s repayment plan.

Chapter 7 liquidation is definitely the quicker option, as the process usually takes only around half a year at most, and both individuals and businesses can file for it. However, don’t be blinded by the way this sounds. Naturally, to discourage everyone from doing so, the event has one of the worst effects on financial status for up to 10 years after it’s finalized, making it extremely hard to qualify for any kind of credit thereafter. Also, all assets that fulfill certain criteria will be sold to lower the debt first. With all that said, it could still be a viable solution for those who simply cannot afford to make further payments at all.

A repayment plan under Chapter 13 could be an alternative for some. This type does not forgive outstanding debt, but rather establishes a new payment schedule for your debts, distributed throughout the upcoming three to five years. It does take longer than liquidation, however, it “only” stays on your report for seven years, and it can even fully stop an ongoing foreclosure, without the bankrupt person or business having to sell any assets.

Debt settlement: Pros and Cons

Serving as a sort of middle way, debt settlement’s benefit is that it combines the great characteristics of bankruptcy with possibly reduced long-term effects. The effects of debt settlement can stay on credit reports for up to seven years, and just like bankruptcy, it will negatively affect your credit score—however, its impact can be lowered in certain cases. Interestingly enough, the lower your credit score before beginning a debt settlement program, the lower its effects will be, and vice versa. 

How it typically works is professionals trained for such negotiations approach the clients’ creditors, and reach an agreement, which usually relieves a significant portion of the owed amount. Nevertheless, a disadvantage can be that the full balance is rarely forgiven, hence the client will have to repay some of their debt. 


If you’re struggling with your credit card or any unsecured debt, evaluating your options is never a bad idea. As there is nothing to lose, we’d highly recommend consulting with  Americor, to come up with a solution that is most suitable for your situation—just remember one thing: there’s always a way out. 

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Aaron Sarentino

Aaron oversees executive, administrative and management functions for the firm. Aaron has a Bachelors in Business Administration from Pepperdine University. He is responsible for helping customers at every stage of the debt settlement process and focused on building loyalty to ensure long-term client retention by addressing customer issues. Aaron plays a pivotal role in the upliftment of the Americor team to ensure the best possible customer experience for clients.