Debt Consolidation v. Debt Settlement

Debt consolidation is a structured principle repayment plan – you take out a new loan with a lower interest rate to pay off your debts with a higher interest, such as credit cards, over 3-5 years. Debt consolidation enables you to repay the full amount of your debts faster than by making payments to individual creditors thanks to much lower interest rates offered for such loans. Also, debt consolidation may reduce your monthly payment and improve your credit score if you make your scheduled payments on time over the course of the repayment plan.

On the other hand, debt settlement offers a principle reduction in exchange for a lump sum payment to each creditor. Unlike debt consolidation, debt settlement may result in negative impact on your credit, as well as you will have to pay taxes on the forgiven debt. Also, for creditors to consider debt settlement, you generally must be several months behind on your payments. Even then, however, there is no guarantee that a creditor will agree to accept an amount lower than the debt.

Bankruptcy v. Debt Settlement

Whether to file bankruptcy or settle a debt depends on individual circumstances of each case. However, since both options will negatively affect a debtor’s credit rating, very often bankruptcy is the best solution when the debtor qualifies for bankruptcy. First of all, bankruptcy is an expeditious and somewhat predictable legal process, whereas there is no guarantee that a creditor will agree to accept less and the debt settlement proceeds may take months to years. Additionally, by filing bankruptcy, a debtor will not face tax liability for discharged debt, whereas with a debt settlement the debtor will have to pay a portion of the debt, the income taxes on the forgiven amount, and the attorney fees.

Debt settlement may be a better solution for a debtor who qualifies for bankruptcy, but has assets substantially in excess of the allowed bankruptcy exemptions, who wants to settle only selective debts, or who does not want to have a record of bankruptcy.

How can we help?

We have successfully negotiated debts with lenders for 25% to 80% of what the owed amount. We can evaluate the individual circumstances of your case to work out the best strategy to resolve your financial liabilities. Call us now for a free initial phone consultation to discuss your options. (386)-248-3000.