Debt is stressful, no matter what caused you to fall and lose control of your finances. Whether or not it was poor financial decisions or an unexpected medical emergency that began your spin out of control, debt needs to be handled as soon as it becomes a situation.
There are 4 debt consolidation options which you choose will depend on the severity of your financial situation.
Option 1 – Debt Settlement
Debt settlement involves working with your creditor to try and reduce your balance or restructure your payment plan to give you more time to come up with the money you owe.
This is a viable option if your financial situation isn’t too severe and your lender seems flexible (i.e. banks are more likely to work with you than credit card companies). A settlement is completely voluntary for your creditors, so they will need to understand your situation, trust you are going to follow-through with the agreed upon plan, be willing to work with you and often, need to see some personal benefit.
Proceeding with presenting a settlement offer should be done after you organize your financial statements and build a case around why you aren’t able to make your payments. For example, if you have had a life-changing event occur, such as job loss or medical emergency, you should gather all notifications, medical bills, etc. to present to your lender. Under no circumstances should you bluff or stretch the truth about your situation in an attempt to make your lender more likely to accept your settlement offer. Your financial situation is well documented and the truth will come out, eventually.
Debt settlement shouldn’t be entered into lightly. If you are not able to follow-through with your proposed plan, there will be severe financial repercussions. Additionally, if you choose this option you should know that it will be noted on your credit report for 7 years, may influence your ability to get credit in the future and any balance that is waived is subject to being taxed.
Option 2 – Debt Consolidation Program
Debt consolidation programs are similar to settlements, except the negotiating with creditors is done by a third-party consolidation company. Your consolidation company will work to consolidate your debt into one payment, which you will make to them. They will entice you with lower monthly payments and interest rates. But make sure you read the fine print before agreeing to enter into business with them.
Debt consolidation companies exist to make money, like any other business. These programs have fees that allow them to make money and end up adding costs to your already difficult financial situation. Additionally, your contact at this company is often out of state, making communication difficult and impersonal.
Just like debt settlements, this is voluntary for your creditors and is merely a debt shifting solution. It may ease your stress short term, but you will still be responsible for completely paying off your debt which most likely has increased due to fees and lengthened repayment plans.
Before diving head first into a debt consolidation program we recommend comparing to the chapter 13 alternative.
Option 3 – Chapter 13 Bankruptcy
If you can leave behind the stigma associated with bankruptcy, you may find one of the next two options may be right for you. Chapter 13 bankruptcy, also called the “wage-earners” bankruptcy, is essentially a repayment plan that you can afford. It allows you to prioritize your debt and make payments based on your income. This plan is best for those who are experiencing a temporary setback and just need some time and space to breathe.
A chapter 13 allows you to keep all your possessions. You will be bound to a repayment plan that spans 3-5 years with bi-weekly or monthly installments that are calculated based on your income. You will make payments to a trustee who will turn around and pay your creditors.
The amount you pay after 3 or 5 years may or may not equal your total debt. If you follow-through with your plan, any unpaid debt is eliminated tax-free. Creditors are also bound to this plan and they may not, during or after your case and repayment plan, engage in any collection activities such as foreclosure, wage garnishment or harassing telephone calls.
Post filing for chapter 13 you can expect to see a notation on your credit report for 7 years and a temporary decline in your credit score. Your score can be built back up fairly quickly by responsibly taking on credit and making payments on time. The amount of time the notation is on your report is not affiliated with your credit score.
Option 4 – Chapter 7 Bankruptcy
Chapter 7 bankruptcy is meant for those who absolutely cannot make payments. This option will completely eliminate debt (tax free) and consists of selling some of your property in order to pay your creditors. If you have no assets to lose and you are unable to make your monthly payments, this is a practical debt solution for you. Chapter 7 provides a clean slate, allowing you to start fresh.
Identical to chapter 13, creditors will be required to stop any debt collection actions they are taking against you if you file for chapter 7. After filing, a notification will appear on your credit report for 10 years. However, this doesn’t mean your credit score will suffer for this long. It will most likely take a hit due to your inability to make timely payments (not strictly due to filing for bankruptcy) but can easily be built back up.