When you are confronting a seemingly insuperable amount of debt, you should know that you have options. Bankruptcy is just one of a number of possible remedies that can help you manage your debt and achieve financial freedom. Debt consolidation plans and debt settlement programs are among the alternatives. Knowing your options is the first step toward finding your best course of action.
What is Debt Consolidation?
Debt consolidation companies will combine your debts, which allows you to make one monthly payment to that company instead of multiple payments to various creditors. But note that fewer debts does not necessarily mean less debt. If you have to pay the same total sum of money every month, it’s unclear what you gain just by having to write one big check instead of several smaller ones. And if your total monthly obligation remains the same, it will of course be greater, when you add the debt consolidation company’s own fee. In some cases, the debt consolidation company can negotiate lower interest rates to reduce your debt load, but the consolidator’s fee may still exceed the savings.
What is Debt Settlement?
Debt settlement companies (for an upfront fee, which may be a percentage of your debt) negotiate with your creditors in an attempt to reduce your debts and/or set up payment plans for you.
Cons of Debt Settlement
Many debt settlement companies claim to offer a worthwhile alternative to bankruptcy. The truth is, however, that not all debt settlement programs are created equal. The debt settlement business is largely unregulated; and many such organizations are unscrupulous. Red flags should go up in your mind if a debt settlement company tells you to stop making payments on your debts, charges exorbitant fees upfront, or promises miraculous results (if it sounds too good to be true, it probably is). Many of these outfits are con artists . . . truly Cons of Debt Settlement.
Bear in mind that, like any settlement, a debt settlement is strictly voluntary: a valid settlement requires the agreement of your creditor, but he is not required to agree. So the debt settlement company may be unable to reduce your debt at all. Or, again, the reduction may be less than the settlement company’s fee.
Even if the settlement organization succeeds in reducing your debt, the process is time-consuming, usually taking a year or two. While you are waiting for the debts to be negotiated, interest and late fees will continue to accrue, creditors and collection agencies will continue to call, your credit will take a major hit, and you may face lawsuits or wage garnishment; all making it even harder for you to dig yourself out of the hole.
Pros of Debt Settlement
If you’re lucky enough to get a scrupulous and effective debt settlement firm, and if your creditors are sufficiently open to negotiation (two very big if’s), you may be able to get free of debt in three to five years, which is similar to most Chapter 13 bankruptcy plans.
The Bottom Line
For some consumers, debt settlement (or debt consolidation) may be a viable alternative to bankruptcy. But if such alternatives are unavailable, or if they fail, bankruptcy can eliminate most of your unsecured debts, and give you a fresh start. Meeting with an experienced and ethical bankruptcy attorney can help you weigh your options and determine the best course of action for your situation. And if pursuing debt settlement seems desirable, an advantage of retaining us is that we can guide you in selecting and dealing with a debt settlement organization, and your creditors will be more likely to offer you a good deal, aware that, if they don’t, you might file for bankruptcy—and they’d end up with nothing.