When you reach a point where you're overwhelmed with debt that you can't keep up with, bankruptcy is an option that you have to consider. For some, bankruptcy is the best option. However, many consumers don't realize that bankruptcy isn't their only option. Debt settlement and debt consolidation are two other options that are commonly utilized by consumers who are facing overwhelming debt. Take a look at some of the pros and cons of debt settlement, debt consolidation, and bankruptcy so that you can determine which one is right for you.
Debt settlement is essentially the process of contacting each of your creditors and offering them a lump sum of cash to settle your debt. Debt settlement plans are highly individualized, as each creditor is different and each person's ability to pay is also different. For example, one creditor might agree to settle the debt for 20% of the amount you owe, while another might insist on no less than 50%. Some creditors may agree to allow you to pay off your negotiated debt settlement in installments, while others might insist on a one-time payment.
You can negotiate debt settlements yourself, but many consumers choose to use an attorney to handle the negotiations. Whether or not you use an attorney to negotiate your settlements, you should have an attorney look over your debt settlement agreements before signing them.
Debt settlement is a good choice if you have a lot of liquid assets that you don't want to lose in a Chapter 7 bankruptcy and you have too much debt to qualify for a Chapter 13 bankruptcy. On the downside, debt settlement can sometimes have a bigger negative effect on your credit report than a bankruptcy because you'll incur multiple negative entries on your report for each creditor instead of just one bankruptcy.
Debt consolidation is similar in many ways to debt settlement, but it spares you the hassle of negotiating with and paying each creditor separately. Instead, you stop making payments to your creditors and authorize a debt consolidation company to do so on your behalf. You sign an agreement that allows the agency to withdraw one monthly payment from your bank account each month, and this payment is used to pay creditors as well as the agency's fees.
As with debt settlement, debt consolidation allows you to avoid bankruptcy and is useful for consumers who have many assets that they don't want to lose in a Chapter 7 bankruptcy but too much debt to qualify for Chapter 13 bankruptcy. It can also be less confusing for consumers who don't want to deal with making multiple payments—with debt consolidation, you're only making one payment a month.
The disadvantage of debt consolidation is that it's time-consuming—it can take years to pay off all of your debt plus the fees for the debt consolidation agency's services. By way of comparison, a Chapter 7 bankruptcy is usually settled in four to six months. If you opt for debt consolidation services, make sure to choose a reputable agency and that your case is being handled by lawyers who are licensed in the state they operate in.
If debt consolidation or debt settlement don't work for you, bankruptcy may be your best option. The two most common types of bankruptcy are Chapter 7 and Chapter 13 bankruptcy. Chapter 7 bankruptcy is often advisable for a consumer who has few assets. This type of bankruptcy wipes out all eligible debt, giving you a clean slate. Under Chapter 7 bankruptcy, you'll have to give up certain types of property to be liquidated so that the money can be given to your creditors. You won't lose everything—your home and car, for example, are usually exempt. However, a vacation home might not be.
If you have property that won't be exempt and that you don't want to give up, Chapter 13 bankruptcy is another option. Chapter 13 bankruptcy involves making a court-approved payment plan to pay off your creditors. The court will appoint a trustee, and each month you'll make your payments to the trustee, who will then distribute the money to the creditors. This option allows you to keep your property, but can take much longer to complete. And if you fail to make payments, you may end up defaulting, which allows your creditors to begin collection activities again. This can put you at risk of foreclosure, repossession, and wage garnishment. Also, there are limits on who can qualify for Chapter 13 debt. If you have over $1,184,200 of secured debt or over $394,725 of unsecured debt, you won't qualify.
It's okay if you're not sure which of these options are right for you. Your best bet is to speak to an attorney who handles debt consolidations, like James Alan Poe, P.A. They'll be able to evaluate your financial situation and help you figure out which choice best meets you needs.