Credit score considerations for bankruptcy and settlement

Once thought to be mysterious and difficult to comprehend, credit scores are now the focus of countless educational initiatives. Knowledge is power, and those who know more about how to increase their credit score are apt to have not only more borrowing power but more peace of mind later on.

In Mississippi, a common cause of overwhelming financial challenge is credit card debt. When added to student loan debt and auto and mortgage debt, as well as medical debt, the end result can be a strain on a person's credit score. Still, there are ways to emerge from debt without unnecessarily or overly damaging a credit score.

For those with massive amounts of credit card debt, and who cannot make the minimum monthly payments, a common concern is whether it's better, score-wise, to attempt to settle with creditors or if filing for bankruptcy makes more sense. With both bankruptcy and settlement, the accounts in question are taken off a credit report after seven years. In Chapter 13 bankruptcy, the bankruptcy itself often stays on one's report for the same amount of time. Chapter 7 bankruptcy, though, it stays on for 10 years. However, in this type of bankruptcy, assets can be liquidated so it may be a better option for those with tremendous debt difficulties.

Many may find debt settlement appealing, but one thing to keep in mind is that settling itself often requires a considerable lump sum payment. If someone's financial situation doesn't allow for the relatively quick accumulation of the lump sum needed, bankruptcy may be more realistic.

Source: Fox Business, "Debt settlement vs. bankruptcy: Which is worse for credit score?" Jane McNamara, April 23, 2014

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