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I'm considering either settlement or filing a Chapter 7 Bankruptcy for about $110k in credit card debt.

However, it seems like both options will stay on your record for 10 years and also decimate your credit score.

Is there a way to find out which option would do less damage? Is there a way to simulate this score somehow?

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Clarification: It is realistic for me to easily get paid 10-25% in the next 3 months the pay back a potential settlement for about $110k in credit card debt. However, my income is completely sporadic, as I'm a specialist-contractor (and expensive). Currently, just got paid $5k for a small week long contract, but sitting on it for daily expenses (was at 0 in the bank for a scary while). CC's now 3 cycles late. Won a small $1k prize last weekend but that will be Net60 before payday. Trying to get next contract, but it's uncertain.

  • If your credit's going to take a big hit for ten years either way, I'd take the approach that saves me $100k+. – ceejayoz Apr 18 at 13:55
  • When you say "minor 6 digits of credit card debt", do you mean it is $100,000+, or $1000.00+? Bankruptcy sucks for a long time, if you are talking a few thousand I'd settle, if you are talking $100,000+ (6 figures) then bankruptcy may be better. – Ron Beyer Apr 18 at 16:16
  • so i am a technology specialist / contractor.. when i get a contract, it's easily 4/5 digits. however, somehow, it's been slow. i'm thinking i can get 1 - 3 contracts, settlement down the $100k+ credit card debt by the end of this year. however, if my credit score will be decimated both ways, maybe i should just go for bankruptcy? (i have 0 assets) – ina Apr 18 at 23:41
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Credit score algorithms are proprietary and therefore there's no way for sure to know how much of a hit your bankruptcy will be. There are FICO simulators, but, well, you have to pay to access them, and they aren't necessarily reliable. You are already aware that bankruptcy stays on your credit report for ten years.

Estimates at moneycrashers.com indicate your credit score will take a hit of between 160 and 220 points. Note that your credit report will also note the bankruptcy. Realistically, this means you won't have "good" credit until the bankruptcy falls off your credit report. Even if you do everything perfectly from now on, you aren't likely to see a score in the 700s for a decade.

Still, this may be a good option for you. Discharging that amount of debt will meaningfully affect your day to day life, I expect, and will give you a chance to build up good habits. As to whether it's a better option than settling, I'm afraid this is tough to say. Obviously, a settlement means you have to pay some amount of the debt. This article at thebalance indicates a settlement will affect your credit score by between 45 and 160 points, but doesn't indicate how long this will last. Other sites I've seen suggest perhaps six years, but it may be as long as 10 years, as you indicate. Note that the timer on the settlement starts once you've completed the settlement, not when you agree to the settlement. If you are paying, say, $10,000 a year for six years, the timer starts at the end of the six years.

This tends to indicate a settlement is a better option than a bankruptcy as far as your credit report is concerned. The obvious cost is, well, cost. You may be required to pay back a substantial proportion of your credit card bill.

You may wish to search for debt counselling services in your area. If possible, look for a service which does not make money off of your situation; a lot of services will charge you money or take a percentage of the value of your debt, meaning they may not have your best interests at heart.

Ten years seems like a long time. And, look, it is. But I screwed up my credit in my 20s. No bankruptcy, but lots of late bills. Now my credit report is impeccable and my credit score is well into the 800s. I had to educate myself, change my spending habits, and it look work and dedication. You're starting this process. You can get through it. It's really hard to start, but then the good habits just become second nature. :)

  • Do you have a source for the settlement timer point? Paying debts doesn't reset the timer on how long it can be reported on your credit score, it can reset the timer on how long they can attempt to collect from you. – Hart CO Apr 18 at 14:41
  • I tried going to a free clinic - but they were not able to offer more more info than what I found online. They also could not answer this question I posted either. – ina Apr 18 at 23:39
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Let's first clarify the time frames for the credit hit: Chapter 7 bankruptcy stays on your credit report for 10 years. Chapter 13 bankruptcy, and also debt settlement, will only stay on your credit report for 7 years.

How big is the credit score hit? On myFico they have a simulator which I just tried. With good credit, after adding a bankruptcy the FICO 8 score drops were 210 (EQ), 280 (T), and 260 (EX) points. It does say that the drop will be less for people that already have negative items on their report. That, plus presumably your utilization is already high, so your drop will likely be less points than those simulated numbers. Unfortunately, the simulator does not allow me to simulate a different starting scenario other than my own, and also doesn't have a simulation for debt settlement. However, in order to achieve debt settlement you typically have to stop paying your minimum payments first, which you have done, and there is a simulation for "Don't pay any of your bills" which yields drops of 100 (EQ), 125 (T), and 140 (EX) points. Similarly, "Miss a payment by 90 days" will drop the score by 120 (EQ), 110 (T) and 115 (EX) points. Once you actually settle, the way it affects your credit score will be highly dependent on how each company chooses to code the debt. There are options for "paid as agreed" (no drop) which is much better than "paid settled" (medium drop) which is better than "unpaid" (big drop). Presumably, if you settle, (or start making payments again), the portion of your score for payment history should go up compared to the current status of "unpaid". As for the utilization ratio portion of your score, as your debts are paid your numerator will decrease, however, oftentimes settled debts will involve closing the accounts so the denominator of the ratio is decreased too. It's possible after settling you'll have no open lines of credit, so I would recommend trying to pay one off in full so you can keep it.

Some general thoughts:

  1. The fact that you feel your $110K debt could likely be settled with a little effort on your part means you may not be eligible for Chapter 7 bankruptcy. I'm not saying you definitely wouldn't be eligible, but to get it seems like you might have to stretch the truth about your income potential, and perjury is absolutely not recommended.
  2. The more likely consideration will be Chapter 13 bankruptcy vs settlement. Since you still have to pay your creditors with Chapter 13, I think the scales easily tip in favor of settlement. From a pure credit score standpoint you'll likely be significantly better off with a settlement vs a bankruptcy. It's also possible you'll even be better off financially too. There's also the bonus of not having to go to bankruptcy court.
  3. Lastly, you mentioned in a comment that you feel you could handle settling your debt and pay it off in perhaps a year. Realize that typically when you settle you pay the agreed upon amount immediately. If you can't do that you'll probably need to use a third party debt settlement company which will settle for you, and then charge you monthly payments, but obviously they'll charge you a significant amount for their services.
  • OP is describing the six figures as minor (meaning the most significant digit is 1 or 2), not the debt. – Ben Voigt Apr 19 at 6:00
  • I've lived in a bubble called San Francisco for most of my life. This meant paying $20+ or more for lunch was the average, and a studio apartment costs $3500+ - in hindsight, most days I spent at least $50 on food alone and rent is typically at least $100-$200/day. Perhaps I misused a word in saying my 6 digit debt is "minor", though I feel that paying back a settlement at 15-20% of it is completely do-able in a year for me. – ina Apr 20 at 5:46
  • Because of the high cost of living, I literally have no savings, no assets, no where close to owning a home. Basically no backup money. No retirement or any of that, since I've been entirely self-employed. Generally living sporadic big paycheck to big paycheck – ina Apr 20 at 5:47
  • Trying to get a FTE - however it's going slower than expected. After several interviews, the numbers offered are a fraction of what I was offered 10 years ago, so still searching here for something that will do better than my sporadic contracting. – ina Apr 20 at 5:49
  • @BenVoigt - you're right. I'm not sure why that didn't occur to me. Could be related to my answering the question at night. ;) – TTT Apr 20 at 13:15

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