Whenever an individual is carrying a huge amount of debt, he or she might start to look into possible options for getting rid of, or at least gaining more control over the debt so that it becomes more manageable. Some may consider working with debt settlement companies, while others consider debt consolidation options.
There are many myths about the different options and it is important to know the facts about each one, as well as the differences, to determine what route is best for you.
The Federal Trade Commission has provided consumers with information on handling debt, making particular note of the above-mentioned options and a few others. When looking at the various options, however, bankruptcy will typically prove to be a better choice, do less damage to one's credit and be the most cost-effective alternative for dealing with debt.
Debt settlement and consolidation is not always the best option
Oftentimes, due to myths and un-educated notions about bankruptcy, debtors look to debt settlement to help satisfy their debts; however, many people are not aware of exactly how debt settlement works. Typically, these companies do the following:
- Take monthly payments from the individual;
- Hold those monthly payments until a certain amount has been accrued (likely half of the total amount of debt owed);
Eventually, the company will make a lump-sum payment offer to each creditor that will serve to fully satisfy the debt owed
What does this mean?:
This process will most likely destroy your credit in the meantime since you are not making any payments to creditors while you are building up funds equal to about half the amount of your debts owed. Your credit rating will continue to decline while making payments to the settlement company IN LIEU OF making payments on the debt. You face late fees, over-the-limit charges and interest the entire time.
Once the lump-sum payment offer goes to the creditor, the creditor has NO obligation to take that payment (after you have now destroyed your credit with making no payments for a long time AND then what do you do if settlements are not accepted?)
[verus bankruptcy where your creditors have NO choice but to accept, unless they
can claim fraud or something similar]
Creditors are free to collect from you and take actions to collect (ie. lawsuits, wage garnishments, etc.) until a settlement agreement has been reached (so, since this happens so far down the road, you will likely be sued and face possible garnishments or other collection tactics, while trying to pay money to the settlement company for the settlements to later be offered).
[verus bankruptcy where once you retain an attorney to file, collection agencies,
once being give notice of your attorney's information cannot contact you again; and, once filed, no one can collect from you (collectors or original creditors)]
Any amounts forgiven/settled will likely be reported to the credit bureaus as a charge-off, which affects your credit the same way that a bankruptcy, foreclosure, or any other derogatory would on your credit report.
[versus bankruptcy where there would be no charge-offs for debts discharged in a bankruptcy and the reporting is limited to ONE derogatory on the credit report, simply noting a bankruptcy]
For any forgiven debts, you will receive a 1099 for the following year, as if the amount forgive was additional income, and taxes would need to be paid on the forgiven amounts.
[NO 1099's and therefore, NO tax consequences with bankruptcy.]
Additionally, the debt settlement company does not do this for free - it generally charges a fee that equals a certain percentage of the total debt owed, which is generally much more than it would cost you to file bankruptcy. And, it is very important to remember that the creditor can refuse to settle or work with you/your settlement company. And, at that point, you are still responsible for the debt, which has now possibly doubled due to non-payment fees, late fees and interest, etc.
Debt consolidation is another option that some may consider. This may be a good option for people with high income. Debt consolidation is where a company will consolidate all debts into one monthly payment and then distribute your one monthly payment to your creditors, on your behalf.
Again, however, the balances of the debt do not stop and interest continues to accrue.
Often, the debt consolidation plans will last much longer than a bankruptcy would, certainly longer than a Chapter 7 and usually longer than a Chapter 13. And, you generally get NO discounts on the debts owed. And, much of the same concerns that apply to debt settlement apply to consolidation as well.
Why bankruptcy may be the best choice
Some individuals have a hard time considering bankruptcy as an option. However, the fees that go along with a bankruptcy filing can be much lower than any fees that a debt settlement company or consolidator would charge. Further, if a Chapter 7 or Chapter 13 bankruptcy is filed, the automatic stay goes into effect, which prohibits creditors from taking any collection actions against you at all.
Also, even though the bankruptcy will not necessarily help a person's credit immediately, it is possible to start rebuilding credit immediately after the debts have been discharged. This will most likely happen much faster after filing a bankruptcy, than trying to pay a consolidation OR settle the debts. The options may be overwhelming for an individual; therefore, it is generally a good idea for anyone having a hard time with their debt to speak with a skilled attorney who can review the options and help come up with the best solution possible.
Keep in mind each person's situation is different and therefore, what worked for your friends or other family members, may not be what is best for you.
At Chicago Debt Solutions we assess each individual's situation and advise as to what is best for YOU. If it is not something we do here, then we would point you in the right direction or suggest a different alternative to bankruptcy.
Be careful to just dismiss bankruptcy because you listened to people that are not educated on it and know the facts about it, as it can only be detrimental to you, costing you much more in fees, time and credit that it needs to. Speaking to an experienced and trusting attorney that can guide you to the best resolution, for YOU, is imperative.
Be careful who you give your money to, as money is precious and any income/funds that you can keep for yourself and your family to pay necessary living expenses, the better. Do not just easily hand over your hard-earned money to a company that may not be able to get done for you what you expect.