For many people who’ve dug themselves a deep financial hole, there are a number of options that can give them a fresh start and relieve the anxiety,
uncertainty and often the harassment that goes hand in hand with not being able to pay their creditors.
Each of the options has its pluses and minuses so it’s wise to consider all of them before choosing the one that best meets your unique situation. Among the choices available are debt settlement, debt consolidation and bankruptcy—either Chapters 7 or 13.
Let’s look at debt settlement first. Here, you’ll partner with a firm that negotiates with your creditors—be they lenders collection agencies or credit card companies. They may even be all three. Their goal of debt settlement is to get these creditors to accept a much lower amount than owed, often 30 cents to 50 cents on the dollar. However, keep in mind that the creditors are not obligated to accept the reduced amount, but most are motivated to do so for a number of reasons
Of course, not all debt settlement companies are created equal. You’ll want to do your homework to identify a firm that has the expertise, experience and track record to get solid results. Reputation is everything, and you’re likely to hear about the most qualified debt settlement companies by word of mouth. Avoid those companies that contact you first. That’s a red flag. Also, check the Better Business Bureau to find out the experiences others in your boat have had with the company. Remember the axiom: “Ultimately you get what you pay for.”
The best of the best will gladly answer all your questions, offer a free consultation and and won’t make pie-in-the-sky promises they can’t keep.
Of course, debt settlement has its pitfalls. For one, it will stay on your credit report for seven years. And the IRS considers the amount that’s forgiven as income, meaning it can boost your tax bill.
Don’t confuse debt settlement with debt consolidation. The latter’s goal is to combine debts from several creditors, then take out a single loan to pay them all, hopefully at a reduced interest rate and lower monthly payment. This is typically done by consumers trying to keep up with bills for multiple credit cards and other unsecured debts.
The four major types of debt consolidation are;
Carefully evaluate each approach. Consider the total cost of bill consolidation, the amount of time the process will take and what impact, if any, it will have on your credit score.
And then there’s bankruptcy. In most cases, this should be the option of last resort, although it might be the live preserver people drowning in debt need.
The two most popular forms of bankruptcy are Chapter 7 and Chapter 13. In Chapter 7, certain assets are considered exempt — home, automobile, retirement savings, some tools and some home furnishings — but all others are liquidated and the funds used to pay your creditors.
Chapter 13 bankruptcy gives you a chance to reorganize your finances and come up with a plan to repay all or most of your debt in a time frame of 3 to 5 years.
Unlike debt settlement and debt consolidation, bankruptcy typically wipes out all unsecured debt. Although this may seem like a solution to your money problems, it will have a lasting impact on your credit report, where it remains for 10 years.