Differences between Debt Settlement, Debt Consolidation, and Bankruptcy

Deciding whether or not to pursue filing a bankruptcy to deal with serious financial problems is a serious matter.  It can be helpful to know what other options might be available to you during this time.  Generally, there are two outside-of-bankruptcy options to choose from: Debt consolidation and debt settlement.

Debt consolidation is a debt repayment plan, where you pay back your creditors all of the money you owe them.  One way to accomplish a debt consolidation is to obtain a new loan which is then used to pay some or all of your creditors.  The potential benefit of this type of consolidation is the simplification of the repayment of your debts, and, hopefully, a lower interest rate. The downside to this approach is that it may be difficult to obtain a new loan for enough money to pay off all of your debts.

In the alternative, you can hire a debt relief provider to manage the repayments to your creditors for you.  With this type of consolidation, you make a monthly payment to your provider, who then makes payments to all of your creditors.  Your provider will try to negotiate a lower interest rate on your debts and a lower monthly payment if possible.  You also pay a monthly fee to the provider for the service.  One potential downside to this approach is that one or more creditor may choose not to participate and you would have to continue to pay them directly.  Also, if you miss a payment or make a late payment to the provider, you may lose the lower interest rates or have to withdraw from the program altogether.

Debt settlement is a way to pay back a portion of the debts you owe.  Your creditors will receive a partial payment of the debt and then forgive the rest.  This may be an option for those who have stopped paying their creditors, but can’t afford to repay their creditors in full through a consolidation.  You can attempt to negotiate settlements on your own by contacting your creditors directly and making an offer to pay a portion of the debt in a lump sum.  Typically, creditors will want full payment of the agreed upon amount within ten business days of the settlement.  Also, you may then be required to pay taxes on the portion of the debt that was forgiven by the creditor.

Alternatively, you can hire a debt settlement company to negotiate settlements on your behalf.  If you choose this option, you would make monthly deposits into a settlement deposit account managed by your provider.  Your provider attempts to negotiate settlements with your creditors, and the settlements are paid using the funds deposited in the settlement deposit account.  There is usually a large fee for the service which must be paid prior to any settlements being made.  Typically, the first settlement isn’t negotiated for at least six months and the entire process can take up to five years.  While you are waiting for the debts to be settled, the creditors will often become more aggressive with their collection efforts.  Creditors can continue with all collection activity, including filing a lawsuit, which would enable them to garnish your paychecks and bank accounts.  And remember, you may be required to pay taxes on the portion of the debt that was forgiven by the creditors once the settlement is complete.

Debt consolidation and debt settlement may be viable alternatives to filing for bankruptcy.  Everyone’s situation is different and it is important to weigh the pros and cons of your options when making a decision about your finances.  Our attorneys are happy to answer any questions you might have about bankruptcy or it’s  alternatives during our free consultation.