ADVERTISEMENT

Bankruptcy's credit damage worse than debt settlement's

By

Let's Talk Credit
Let's Talk Credit columnist Jane E. McNamara
Jane E. McNamara is president and chief executive officer of GreenPath Debt Solutions, a nationwide, not-for-profit, providing financial literacy through consumer education and counseling for more than 50 years. For financial literacy tips and assistance visit GreenPath on Facebook or YouTube.
Ask a question.
'Let's Talk Credit' archive

Question for the CreditCards.com expert

Dear Let's Talk Credit,
I was out of work for a few years and my credit cards went unpaid. I am to the point now where they sent me a compromise to pay less. I only owe a total of $13,000. Is this better for my credit than claiming bankruptcy? -- Mike

Answer for the CreditCards.com expert

Dear Mike,
The short answer to your question is bankruptcy will damage your credit more than settling your credit card debt. Let's explore your options in a little more detail.

When considering a settlement offer, you need to be sure you can afford the payment that the creditor is requesting. Another thing to keep in mind is that the IRS considers forgiven debt as taxable income. So, if you owe $13,000 and agree to settle your debt for $5,000, the $8,000 that is forgiven would be considered income for the tax year that it is forgiven. Depending on your income tax bracket, you could owe an additional $1,000 to $2,000 in taxes.

As far as how a settlement will affect your credit, the majority of damage to your credit history was done when the credit cards went unpaid. Creditors like to see that you did eventually pay what you owe, even if you pay only a portion of the total amount due. In addition, with a settlement, the accounts will drop from your credit report seven years from the date of last delinquency. So, if the accounts are already three years old, you would have only four years or so before they no longer affect your credit.

Filing bankruptcy could cause more damage to your credit and for a longer period of time. A Chapter 7 remains on your credit report for 10 years from the date of filing and a Chapter 13 remains on your report for seven years from the date of filing. Creditors may view you as more of a credit risk with a previous bankruptcy on your credit as opposed to a debt settlement.

Depending on your income level, you might not qualify for a Chapter 7 liquidation. Filing a Chapter 13 would require you to repay some portion of your debt. To qualify for a Chapter 7 filing in most cases your income must be lower than the median income for your state.

Another thing to consider is the cost involved with filing for bankruptcy and any attorney fees.

Whatever you decide to do about your old credit card debt, your credit will improve with time and as you add positive information to your credit report each month.

Let's keep talking!

See related: 14 factors when considering bankruptcy, How debt settlement works, how it affects scores 

Meet CreditCards.com's reader Q&A experts

Does a personal finance problem have you worried? Monday through Saturday, CreditCards.com's Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.

Published: October 3, 2013


Join the discussion
We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.

The editorial content on CreditCards.com is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company's business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.




Follow Us


Updated: 09-28-2016


Weekly newsletter
Get the latest news, advice, articles and tips delivered to your inbox. It's FREE.


ADVERTISEMENT