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Is personal bankruptcy the right option to get rid of debt?

Many Tennessee residents are already struggling to pay off large amounts of debt -- tens of thousands of dollars or even more. A job loss, medical condition or other hardship can exacerbate financial problems even further. What are the options for those who are drowning in debt? Should personal bankruptcy be the first choice or should a consumer try debt settlement? Which is the better choice for someone looking to maintain their credit score?

Personal bankruptcy is a major step. When a person chooses bankruptcy, he or she is admitting that they will never be able to repay the debts and therefore they want to be legally rid of them. The major advantage of this solution is that a person's debt slate is wiped clean. The debts do not have to be repaid and the person can start anew.

With a debt settlement, on the other hand, a consumer works with the creditor to settle on a payment that's less than what is owed. If a person owes $5,000, for example, he may try to settle for $2,000. For many creditors, they would rather get some money than none at all, so they would likely take the offer.

Which option is preferred? Bankruptcy can cause significant damage to a credit score for a decade or longer. It can be very difficult to buy a car, house or other large asset during this time. A debt settlement may lower a credit score as well, but not to a huge degree. If a person is considering a debt settlement, they are likely several months behind on payments, so the damage is likely already done.

There are many debt settlement scams out there, however. It may be more beneficial for a consumer to attempt to negotiate debts on their own rather than pay hundreds or even thousands of dollars to an organization to do it -- and add on more debt. Whatever solution is ultimately pursued, an experienced bankruptcy lawyer can help assess each individual situation to reach the best decision.

Source: Nerd Wallet, "Bankruptcy or Debt Settlement: Which is Worse for My Credit Score?," Anisha, Oct. 10, 2013

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