For Struggling Minnesotans Bankruptcy May Be Better Than Debt Settlement

For many people, bankruptcy is the option of last resort. They carry a number of fears about the effects of bankruptcy and want to make sure they exhaust all other remedies before turning to it.

When families find themselves struggling to make ends meet, they frequently investigate debt settlement because they are afraid of how bankruptcy will affect them. What many do not realize is that debt settlement has pitfalls of its own. Before you agree to settle with a creditor, here are a few things you should know.

While this blog will highlight a few of the advantages of bankruptcy, you should speak with a Minneapolis bankruptcy lawyer to fully understand the long-term effects of bankruptcy.

The Downside of Debt Settlement

Debt settlement advertisements have become a frequent fixture on television over the past three years as the economy has suffered. The dark side of settlement companies is that they do not begin paying off your debts when you start paying them.

They typically collect the first three to six months worth of payments as part of their fee. During this time, your credit score could drop by as much as 200 points because of late payments. The actual hit to your credit will depend on your credit history.

The settlement agency will not begin their negotiations with your creditors until they have been paid. Agencies will generally offer to pay the creditor 30 to 50 percent of what you owe.

Even if a settlement is reached, there may be trouble ahead. The first problem is completing the agreement. Most people do not fulfill their settlement agreement. Even if you do, you could be taxed on the amount of debt that is forgiven according to Finally, the third problem is that your credit score will still suffer. Your credit report will show the debt as being "paid" rather than "paid as agreed".

The worst part of a debt settlement is that it will not protect you from a lawsuit. Until your settlement has been paid in full, a creditor can sue you at any time.

The Advantage of Bankruptcy

When people face the threat of having their bank accounts levied or their paychecks garnished, they should explore bankruptcy, because it has a clear advantage. Once your bankruptcy has been filed with the U.S. Bankruptcy Court you are protected by law from your creditors. Creditors are prohibited from trying to collect from you either directly or through a lawsuit.

While bankruptcy will be a negative mark on your credit, this does not mean that you will never be able to get credit again. There are lenders out there that will extend credit to you to help you re-establish your credit after bankruptcy. In fact, many people are frequently surprised by offers for credit cards they receive after filing for bankruptcy.

Perhaps the greatest benefit of bankruptcy is the ability to have a fresh start. The pressure of debt and creditor collection can be stressful to anybody. Managing this strain over a prolonged period can be damaging mentally and emotionally. Bankruptcy can help you get back on the road to financial wellbeing sooner rather than later.

Source:, "Debt Settlement Arrangements and Your Credit Score" 8 September 2011, Angie Mohr

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