Debt Settlement vs. Bankruptcy in South Carolina: Which Is Better for Your Credit Score?

If you are struggling with overwhelming debt in South Carolina, you may have considered debt settlement as an alternative to bankruptcy. Many consumers believe that settling their debts will protect their credit score better than filing Chapter 7 bankruptcy or Chapter 13 bankruptcy.

But new research highlighted by a Bloomberg article challenges that assumption. As a SC bankruptcy attorney for the last 25 years, I have seen that for most Debtors in a bankruptcy are pleasantly surprised that their credit score improves significantly after 6-12 months. This is in sharp contrast to people who try the debt settlement route. This article by Bloomberg confirms what I and other SC bankruptcy attorneys have seen for years,

According to recent TransUnion research, debt settlement can result in a substantially larger credit-score decline than bankruptcy for some consumers. In particular, consumers who were current on their debts when they entered debt-settlement programs experienced a median 96-point decline in their VantageScore over six months, compared with a median 20-point decline among bankruptcy filers.

That finding doesn’t mean bankruptcy is automatically the right choice for everyone. But it does challenge one of the most common misconceptions about bankruptcy: that debt settlement is necessarily better for your credit.

If you are considering bankruptcy in South Carolina, understanding the difference between debt settlement, Chapter 7 and Chapter 13 can help you make a more informed decision.

Why Can Debt Settlement Hurt Your Credit?

Debt settlement is designed to reduce the amount a consumer ultimately pays to creditors. Most people assume if they try the debt settlement route that their score will automatically improve once they enter into an agreement with one or all of their creditors. However, this is farthest from the truth. Unlike bankruptcy which typically significantly improves a person’s credit score, most consumers in a debt settlement program quickly discover that not does their credit score not improve, for many it even goes down? Why? The creditors are often forced to continue reporting the consumer’s negative payment history even though the debt has been settled. This is true if it is for one creditor or multiple.

Debt Settlement can sound appealing. Instead of paying the entire balance on a credit card or personal loan, a settlement company may negotiate with the creditor to accept less than what is owed.

But just as Bloomberg stated in their article, there can be a significant downside.

Many debt-settlement programs involve consumers stopping payments to their creditors while money is accumulated for potential settlements. Once payments stop, accounts can become delinquent and eventually be charged off.

The result can be:

• Missed payments
• Collection accounts
• Charge-offs
• Additional interest and fees
• Creditor lawsuits
• Significant credit-score damage

According to the Consumer Financial Protection Bureau, stopping payments as part of a debt-settlement strategy can expose consumers to additional fees and interest, collection activity and potential lawsuits.

The important point is that debt settlement does not necessarily protect your credit score. In fact it could hurt it.

In fact, the TransUnion research suggests that the opposite can happen.

Debt Settlement vs. Bankruptcy: What the New Research Shows

The TransUnion study is particularly interesting because many consumers entering debt settlement were not already seriously delinquent.

More than half of the consumers studied were current on their debts when they entered a debt-settlement program.

Yet among those consumers, the median VantageScore fell from approximately 645 to 549 over six months — a decline of about 96 points.

Consumers who filed bankruptcy experienced a substantially smaller median decline over the same period.

This doesn’t mean that filing bankruptcy improves your credit score. It doesn’t.

Bankruptcy is a major negative event on a credit report.

However, the research demonstrates that consumers should not automatically assume that debt settlement will cause less credit damage than bankruptcy.

Chapter 7 Bankruptcy in South Carolina

For consumers with significant unsecured debt, Chapter 7 bankruptcy may provide a relatively quick way to address qualifying debts.

Chapter 7 is sometimes called a “fresh start” bankruptcy because qualifying unsecured debts may be discharged at the conclusion of the case.

Depending on the circumstances, debts that may qualify for discharge can include:

• Credit-card debt
• Medical bills
• Personal loans
• Certain collection accounts
• Other qualifying unsecured obligations

Chapter 7 is not available to everyone. Eligibility can depend on factors including income, household size, expenses and other circumstances.

A South Carolina bankruptcy attorney can evaluate whether Chapter 7 is appropriate for your situation and explain how South Carolina’s bankruptcy exemptions may apply to your property.

Chapter 13 Bankruptcy in South Carolina

Not everyone who needs bankruptcy protection qualifies for Chapter 7 or wants to pursue Chapter 7.

Chapter 13 bankruptcy provides another option.

Chapter 13 generally allows an individual with regular income to reorganize qualifying debts through a court-approved repayment plan. Depending on the circumstances, a Chapter 13 plan can provide protection from collection activity while allowing the debtor to address certain debts over time.

Chapter 13 can be particularly important for homeowners who are behind on mortgage payments or consumers who have assets they want to protect.

A Chapter 13 bankruptcy attorney in South Carolina can review your income, debts, assets and financial goals to determine whether Chapter 13 may be appropriate.

Bankruptcy Is More Than a Credit-Score Decision

When people consider bankruptcy, they often focus almost exclusively on their credit score.

That’s understandable.

But it can also be a mistake.

Imagine someone with $80,000 in credit-card debt who is making minimum payments every month. If the person cannot realistically repay the debt, maintaining a good credit score today may not mean that the person is financially healthy.

Interest continues accumulating.

Balances remain high.

Credit utilization remains elevated.

And eventually, missed payments or other financial problems may occur anyway.

The better question isn’t simply:

“Which option hurts my credit score the least?”

The better question is:

“Which option gives me a realistic path to becoming financially stable again?”

For some people, the answer will be repayment. For others, debt settlement may make sense. For others, Chapter 7 or Chapter 13 bankruptcy may be the most appropriate legal solution.

Can You Rebuild Your Credit After Bankruptcy?

Yes. Absolutely!

One of the biggest misconceptions about bankruptcy is that you are permanently negatively affected by a bankruptcy filing. My experience as a bankruptcy attorney in South Carolina is that most filers see a significant improvement in their credit score within 6-12 months of filing a bankruptcy and especially if it isa a Chapter 7 bankruptcy. This is even if the filer or Debtor does nothing. I have some simple tips a filer can do to improve your credit score even more. Feel free to call me to learn more about these simple credit improvement tips!