Arizona residents who are face with insurmountable financial obligations have three primary options from which to choose. These are debt management, debt settlement and bankruptcy.

Debt management plans offer qualified consumers the ability to make consolidated periodic payments on their debt, avoiding harm to their credit rating and bringing the total amount owed down. However, this option is only available to those who have sufficient income to regularly make those installments. Debt settlement is another option, in which a large lump sum payment is made to the creditor in exchange for forgiveness of the entire debt. In cases where the creditor is willing to negotiate such an arrangement this can prevent further injury to the credit rating, but the time necessary to save and assemble the funds for the lump sum payment may be dangerous. Credit scores will continue to decline until the lump sum payment is completed.

Declaring bankruptcy is a third option, though it is the most harmful to an individual’s credit score and ability to secure loans. Fortunately for the debtor, bankruptcy filings are always erased from their credit record after a certain amount of time has passed. Chapter 13 bankruptcy is removed after seven years, but it requires that at least some of the debt be repaid over a five year period. Chapter 11 and Chapter 7 filings will stay on the record for ten years.

The assistance of an attorney can be useful when deciding which of these options is best to get out from under an overwhelming debt. Negotiating a payment plan with one or more creditors is also a possibility for some.

Source: FOX Business, “Debt Settlement vs. Bankruptcy: Which is Worse for Credit Score?“, Jane McNamara, April 23, 2014