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The Ultimate Comparison: Debt Consolidation vs. Settlement vs. Bankruptcy

Posted By:  |  January 2, 2014  |  0 Comment(s)

ultimate debt comparison
When debt begins to overwhelm your life, there are many different options available to relieve you of this debt. Debt relief comes in many different forms. Intending to pay down a loan is one thing, but actually having the ability to pay it down without assistance is another. Here’s a quick look at your options when your debt becomes unmanageable.

Debt Consolidation: If You Can Pay It Off with a Little Help

Debt consolidation is often the first measure taken to help an individual obtain debt relief, and is actually quite common. Debt consolidation is a measure whereby an additional loan with a lower interest rate is taken out in order to pay off other loans with higher interest rates, such as credit card debt. Your loans are basically all combined into one single loan. Commonly, this method is used when an individual has multiple loans, such as a combination of credit card debt and a student loan. This can relieve the debtor of financial anxiety and have a long-term financial benefit, as well as a benefit on their credit score.

This guide from Ready For Zero is very helpful in explaining more about consolidation loans.

Debt Settlement: When Debt Consolidation Doesn’t Go Far Enough

Debt settlement is an alternative type of debt relief. Debt settlement, which is also referred to as debt arbitration, debt negotiation or credit settlement, is a further approach to paying down debt where a lower payment on a loan is agreed to by both the debtor and creditor. Once an agreement is reached, the debtor makes monthly payments to the debt settlement company, who then makes payments to the creditor.

Be aware that while debt settlement can be a good option for many, it can have a negative effect on your credit rating. Because the settlement of debts usually don’t occur until payments are a few months past due, late payments can be reported, which can then remain on credit reports for up to seven years. Since the IRS views forgiven debts as income, the debtor may also be expected to pay taxes on any settled debts. If your creditors do not give you a Form 1099-C for cancelled debts, the settled debt should be included in your tax return.

Bankruptcy: For When Nothing Else Has Worked

A matter under federal jurisdiction, bankruptcy is a legal status that refers to a debtor’s inability to repay debts to a creditor. There are two different types of bankruptcy: Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy, a debtor requests the court to discharge all the debts owing. You have no obligation to pay any debts owing that are discharged in Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, a repayment plan is filed with the bankruptcy court, in which some debts must be paid in full, others partially, and some not at all. Chapter 7 Bankruptcy can wipe out credit card and other unsecured debt, relieve the debtor of creditor or collections agency calls, and eliminate some liens, but it cannot relieve the debtor of paying child support or alimony, repaying a student loan, or paying tax or other non-dischargeable debts. A Chapter 13 Bankruptcy can go above and beyond, allowing the debtor to keep property and stop a mortgage foreclosure. Bankruptcy will, nonetheless, have a grave effect on your credit score. According to FICO, bankruptcy could lower a 780 credit score by up to 240 points, and a 680 credit score by up to 150 points. A bankruptcy can stay on your credit report for up to ten years. For these reasons, filing for bankruptcy is generally considered a last resort, to be pursued when you have exhausted all other options and yet still cannot repay what you owe.

What’s Next?

Choosing the best method for debt relief often becomes a process of weighing present and future needs, and deciding what level of relief – debt consolidation, settlement, or bankruptcy – is necessary. If you just need a little extra help, debt consolidation could be exactly what you need. If you want to end your debt once and for all, a debt settlement could result in you owing a lower amount. When you’ve exhausted all available options and still can’t pay your debts, filing for bankruptcy can discharge what you owe, but it’s a huge risk on your part and should be seen as the very last option. If you’re struggling to manage your debt, one of these options can provide you with the relief you need.

Poll

  • How important is it to you for a debt consolidation company to offer financial education resources?
  • Takes your existing debt and try to settle with your creditors for a lower amount. If you pay off the settled amount, your debt will be considered paid in full.
  • Negotiates with your creditors on your behalf.
  • Fee based on a percentage of your total starting debt or a percentage of the debt they save you.
  • Most settlement companies have you create a separate "escrow" account where you will make monthly contributions over a certain amount of time to contribute to your settlement. Once there is a substantial amount of funds to show your creditors, the settlement company will try to negotiate a lower amount of debt.
  • Combines all your debts and creditors into one monthly payment.
  • Allows you to pay one monthly payment to the consolidation company, instead of multiple payments to different creditors.
  • You no longer owe your original creditors; instead you pay one monthly payment to your consolidation company.
  • Consolidation companies can help negotiate lower interest rates on your debts and help lower your total debt payment in the long run. A lower interest rate will lower the amount you owe in the end.
  • Allows you to consolidate all your different debts into one personal loan that can be paid off over time.
  • Can offer borrowers a lower interest rate with a longer payback term (compared to high-interest credit cards or medical bills). This will lower the amount of money required to pay off the loan over time.
  • Personal loan debt consolidation can be an effective way to raise your credit score quickly (within 3-6 months).
  • Borrowers can receive funds from their loan within only a few days.

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