Debt consolidation is a debt relief option allowing individuals to combine or "consolidate" multiple higher-interest credit card, or other unsecured debts (such as medical bills, store or gas cards) into a single, more affordable payment each month. Typically, debt consolidation programs are coordinated by debt counselors who customize a "debt management plan" providing consumers with a proven and predictable path to get out of debt.
Pros of Debt Consolidation
- Provides proven, predictable program to become debt free
- Saves money, reduces interest, waives late fees/penalties
- Allows you to pay off debts at a pace that fits your budget
- Manages multiple debts via single more affordable payment
- Puts you back in control of finances to help reduce stress
Cons of Debt Consolidation
- Requires discipline to make single monthly payment
- If you default, you revert to original creditor agreement
- Creditors not required to accept debt relief proposals
- Often takes 3-5 years, or more, to become debt free
- While not necessarily harmful to your credit score, will be "noted" on your report
Debt settlement is a debt relief option that has become increasingly popular among people who need relief from high-balance credit cards (typically $20,000 to $125,000 or more). Through debt settlement, debt specialists negotiate with creditors on your behalf – with the goal of "settling" your credit card debt for substantially less than you currently owe.
Pros of Debt Settlement
- By settling debt, you can save a substantial amount of money
- Can help you settle credit cards in as little as 12-36 months
- Allows you to make low monthly payments you can afford
- Settles debt and provides alternative to bankruptcy
- While negative to credit, not as severe or long-lasting as bankruptcy
- Unless "attorney-based" fees only paid after successful settlement
Cons of Debt Settlement
- Typically only benefits those with high-balance credit cards
- Amount of money saved through debt settlement subject to taxes
- Requires discipline to "set aside" money for successful settlement
- Creditors may threaten, or take, legal action to collect debt
- Negative impact on credit due to default on credit agreements
- Creditors may not agree to accept your debt settlement offer
There are many well-respected self-help credit and debt experts who provide a wealth of valuable advice on the wise use of credit and how to become debt free – experts such as Dave Ramsey, Suzie Orman, Clark Howard, and many others. But regardless of the system you follow – the first step in a successful do-it-yourself debt relief program is to do everything possible to live within your means – avoiding unnecessary "impulse" purchases that cause debts to spiral out-of-control. By creating and maintaining a realistic budget, you will avoid taking on additional debt.
In addition, you can take steps on your own to reduce existing debt by contacting creditors directly to request more favorable interest rates or terms, or offer to settle debt for less than the full amount owed.
The bottom line: If you have high-interest credit cards and other debts and are struggling to make ends meet – you are in need of debt relief. Whether you take advantage of a debt relief program such as debt consolidation or debt settlement, or commit yourself to take control of your finances and negotiate with creditors on your own – take positive steps today to get on the path to become debt-free.
7 Important Debt Relief Tips
- Create a realistic spending plan – a personal or family budget
- Set aside money each month to pay down your existing debt
- Stick with your plan. Avoid unnecessary "impulse" purchases
- Contact your creditors requesting lower interest rates or to settle debt
- Pay down debts one-by-one, starting with highest-interest debt
- Don't use credit cards! Use a debit card to stay on track
- Avoid taking out additional loans that add to your debt load
Bankruptcy is generally considered to be the debt relief option of last resort. There are several types of bankruptcy: Chapter 7 (straight bankruptcy or liquidation), Chapter 13 (reorganization of debts), and Chapter 11 (debt reorganization normally used by a business or partnership). While a successful bankruptcy can provide a fresh financial start – individuals or businesses should carefully consider bankruptcy before proceeding because of its long-term financial implications.
Pros of Bankruptcy
- Debtors given a fresh start – a new financial lease on life
- Upon filing Chapter 7 or 13, collection efforts must stop
- Debts discharged. Creditors forgive most unsecured debts
- Your home, auto, and other essentials may be protected
- Wages you earn after bankruptcy go to you, not creditors
- From bankruptcy filing to relief takes about 3-6 months
Cons of Bankruptcy
- Bankruptcy stays on your credit report up to 10 years
- Makes it difficult to obtain credit for home, auto, and more
- Requires forfeiture of your existing credit cards
- You lose property not exempt from sale by trustee
- Doesn't discharge student loans, tax debt, alimony
- Debt option of last resort that can be embarrassing
Bankruptcy
Summary
While bankruptcy is a debt relief option that has been able to provide a fresh start for many individuals, families, and businesses – it is a serious decision that should be carefully considered with the assistance of a financial advisor or attorney who can help determine if bankruptcy is the proper course of action.
Prior to 2005, those filing bankruptcy could choose the type of bankruptcy they preferred – and most elected to file Chapter 7 straight bankruptcy (liquidation) over Chapter 13 (structured repayment). However, rules enacted in 2005 now requires those filing Chapter 7 to pass a "means test" – to qualify, they must earn equal to or less than the average monthly income for a family of their size in their state.
In addition, before you can file for Chapter 7 or Chapter 13 bankruptcy, you are now required to complete credit counseling with an agency that has been approved by the United States Trustee's office.
While bankruptcy plays a vital role to help rescue individuals and businesses, it is important to recognize that it's not the only debt relief option. A debt specialist can provide more details on debt relief alternatives to bankruptcy as part of your free debt relief analysis and savings estimate.
