Credit Card Debt Reduciton: Bankruptcy vs. Debt Settlement

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Credit card reduction offers a variety of choices which include filing for bankruptcy or debt settlement. People typically pursue these options to reduce or eliminate their credit card debt. However, if they make the wrong mistake their attempts at credit card reduction could turn into more debt.

Credit Card Reduction Option: Bankruptcy

Personal bankruptcy is a legal process where people eliminate or repay their credit card and other debt. The U.S. Bankruptcy Court gives individuals two options. The first option is called chapter 7 bankruptcy. Under chapter 7 people eliminate their credit card debt. This means they do not have to pay credit card companies. The other option is called chapter 13 bankruptcy. With chapter 13 individuals repay credit card companies—in monthly payments give to the bankruptcy court—over three to five years.

Benefits to Bankruptcy

Bankruptcy provides legal protection. Creditors can’t sue, garnish wages or foreclosure.


Unfortunately, bankruptcy can stay on people’s credit history for approximately 10 years and may lower credit scores. With chapter 7, people may have to give their non-exempt property to bankruptcy trustees to sell with the proceeds going to the creditors.

Credit Card Reduction Option: Debt Settlement

Debt settlement is a process where credit card companies agree to accept a less amount of money than the original amount owed. For instance, if an individual owes a credit card company $900 the company may accept $500 to settle the debt. People can negotiate terms on their own, hire an attorney or go through debt settlement companies to settle debts.

Debt Settlement Benefits

Usually, individuals choose debt settlement to avoid other debt management options such as debt consolidation or bankruptcy. Besides, credit card reduction, people no longer have to deal with harassing phone calls or letters from creditors.

Disadvantage Debt Settlement

Debt settlement can damage people’s credit scores because credit cards companies report the debt as settled than paid. To new creditors settled is interpreted as the creditors sued people to obtain repayment instead of people actually paid the debt. Also, the Internal Revenue Service (IRS), views the money people didn’t pay in settlement as income. In other words, the IRS expects the individual who paid $500 to settle the $900 credit card account to pay taxes on the $400 they didn’t pay.

Contact a Lawyer

People considering credit card debt reduction options should obtain legal counsel. Bankruptcy attorneys can determine which bankruptcy option is best. Also, lawyers can help people avoid debt settlement scams.