Individuals struggling with debt find they have many options to get relief. Some men and women turn to bankruptcy to erase most or all of the debt, and some people try debt settlement to lower the amount they owe. Both hurt a person’s credit score, which explains why many debtors now want to know more about debt consolidation and how it may benefit them. Understanding the differences between the three allows each debtor to find the solution most appropriate for them. For each person, the answer will be different for unique reasons.
Debt Consolidation
Debt consolidation involves merging all debts into one financial product. Debtors find they have three options to accomplish this goal. With a debt consolidation loan, the borrower takes out a personal loan and uses the funds to pay off all debts. Doing so provides them with one monthly payment and a lower interest rate most times. Another option involves taking out a new credit card with a low- or no-interest balance transfer option. Again, the debtor makes one monthly payment and saves money during the introductory period. However, the borrower must ensure they pay the balance in full before this period ends or the interest rate could jump significantly. For some, programs such as these won’t work. They need help in the form of credit counseling so they don’t get into trouble again. These individuals benefit from a debt management program that also requires only one payment each month. Credit counseling comes with programs of this type.
One reason many people choose debt settlement involves the single monthly payment. They find it easier to budget for this payment, and it eliminates the worry that they will miss one or more payments. Missed or late payments come with late fees and penalties which increase the debt. They don’t want this worry any longer and find debt settlement removes that concern. Those who choose a debt management program need to ensure it includes a credit counseling element, as they don’t want to find themselves in a similar situation in the future.
The process for merging the debt varies by the method selected. However, all three debt consolidation methods typically have little impact on the borrower’s credit score, as negative items aren’t added to the report. Nevertheless, debt consolidation takes longer than bankruptcy when paying off the debt. Debtors must realize this and decide if this option works for their situation. For some, they need to pay the debt quickly, but others find the extended payment plan meets their needs while allowing them to clear their debt. If this option sounds appropriate, check out National Debt Relief.
Debt Settlement
For-profit companies offer debt settlement options. When a person works with one of these providers, the company contacts the debtor’s creditors to try to arrange a settlement to resolve the debt. This amount is less than the amount the debtor actually owes, although there is no guarantee the creditor will agree to a reduced amount. Every month, the borrower puts money into a savings account reserved for debt payments. When they have enough to pay the settlement amount, the money goes to the creditor. While the money is being deposited to the special account, the debtor stops making payments on the debt.
Clients of debt settlement programs find the process negatively affects their credit score. They aren’t making payments as they put money aside and each late or missed payment shows up on the credit report. When the savings account has enough money to pay the debt, the creditor might not agree to the amount offered. Furthermore, many companies require an upfront fee with no guarantees they will help the debtor. For this reason, many individuals choose either debt consolidation or bankruptcy rather than the debt settlement option. However, this option remains open for those who feel it might be appropriate.
Bankruptcy
Source: Detroit Bankruptcy Law Firm
Individuals looking to get out of debt quickly who have no concern for the negative impact on their credit score turn to bankruptcy for relief. Men and women find they have two options when filing for this relief. Chapter 7 bankruptcy allows a person to clear their debt within six months. Assets that don’t qualify for relief must be sold as part of the bankruptcy process, but it often surprises debtors to learn what they can keep. However, courts now require a means test before allowing a person to file for Chapter 7. Those who don’t qualify for Chapter 7 may file for Chapter 13 bankruptcy.
Chapter 13 bankruptcy takes longer, and debtors must make payments on the debt they own. Most Chapter 13 plans span three to five years. At the end of the designated period, the court will erase any debt that remains. Many individuals find they don’t save time by choosing this bankruptcy option, but one benefit of filing chapter 13 is it remains on the credit score for less time than a Chapter 7 bankruptcy filing.
Bankruptcy negatively impacts a person’s credit score, and a Chapter 13 bankruptcy remains on the person’s credit report for seven years. Individuals who file for Chapter 7 bankruptcy find the filing remains on their credit report for ten years. This could negatively impact a person’s odds of getting approved from a home loan, a car loan, or another financial product. Nevertheless, some individuals who have filed for bankruptcy say they could get a loan in just a year or two. Their reasoning is the lender knew they couldn’t file for bankruptcy again for several years so they would be taking on less risk.
Individuals need to sit back and consider the benefits and drawbacks of each option. What works for one person might not be appropriate for another. Contact different companies to learn how they can help you. Many companies give potential clients a ballpark figure in terms of their savings, fees, and more. Gather as much information as possible to determine which option works best for you.
Don’t give up. You can improve your financial future using one of these methods. Countless individuals have done so with great success in the past. Learn from them and get started today for a better financial future.
