Understanding the differences between debt settlement, debt consolidation, and bankruptcy
American consumers had created a record of sorts at the beginning of 2018 when credit card debts of the nation stood at a whopping $1.02 trillion. It shows the growing dependence on debts without which it will be difficult for consumers to maintain their lifestyle. Indeed, medical debts are also part of credit card debts because many consumers use credit cards to pay medical bills. Although credit cards debts top the list, people avail many other kinds of debts too. From payday loans to personal loans and credit lines, consumers avail of many types of debts to meet the rising cost of living. While availing loans is a breeze with multiple sources ready to give you money, paying back loans is never that easy, especially when you have many loans.
How to make it easy to pay back loans and yet carry on with debts is a question that haunts every borrower. People struggling with debts are eager to seek professional help in debt relief from companies like Nationaldebtrelief.com/ that can make life easy for them. Relief from debt can come in many ways and what is best for one person might not be suitable for another. It depends on the individual's financial condition and the extent of debt because any debt relief program depends on the payback ability of the individual. It also depends on the financial goals that you want to achieve because you can use the debt relief measures to rebuild your finances. Therefore, debt relief companies can work out customized solutions for their clients by evaluating their financial status and needs.
Methods of debt relief
Those familiar with the measures of debt relief know about the two established ways like debt settlement and debt consolidation which any debt relief company would typically suggest. Besides, there is a third method often heard about, bankruptcy. While the debt relief company would work out a suitable package for you that help to manage debts better and provide relief, you should understand it clearly to judge its merits and have confidence in the decision taken by the experts.
In this article, we will explain the three methods in detail so that you can understand the nuances of each and evaluate it in the right perspective. This important because the terms debt consolidation and debt settlement are so similar and used interchangeably that not knowing its differences could result in choosing the wrong option.
Paying back debt once and for all is at the heart of debt settlement. When you owe money from some lender, you can negotiate with them to convince them to accept your proposal of paying back the loan in one go but for an amount less than what you owe them. Usually, when you have substantial debt with a single creditor, this method should work well, but it does not mean that you cannot apply it to many creditors. It all depends on your financial abilities and financial goals that you want to achieve by taking into account your ability to pay back. The process entails tough negotiation with lenders because they would generally be reluctant to settle for anything less than what you owe them. How well you can convince them decides the outcome.
But, once they agree, you could enjoy life without that debt although you might carry on with some other debts. The method is not only difficult to implement but also risky, which is why financial experts would recommend it as a last resort. The credit score takes hit as you have not paid back the full amount and it remains on record for seven years which means that you lose access to credit in the future.
You must have heard about debt consolidation a lot because it is one of the most popular methods of debt relief. When not only the quantum of debts but also the number or creditors or lenders are your concern, the only way of killing two birds with one stone is to consolidate debts so that you choose to live with a single debt. The method consists of taking a fresh loan for paying back debts and usually known as debt consolidation loan. The loan amount is equivalent to the outstanding debts. Then you have to negotiate with all other creditors and make them agree to settle their loans on some special terms. Once they accept, you have just one big loan to deal with, wiping out all the other loans that were too much stress to handle and the cause of your woes.
In this method, your credit score will go down temporarily but as you have a new loan to pay back, doing it well can help to recover and even better the credit score quickly.
Bankruptcy might provide you with legal protection against debts as it gives an opportunity to restructure debts or eliminate it; you might be risking your financial future in the process. Once you declare yourself bankrupt, it will be an uphill task to rebuild your finances. Individuals and small business most commonly file for bankruptcy under chapter 7 and chapter 13. If you want to eliminate all types of debts, you have to file for bankruptcy under chapter 7 but if you're going to restructure your debts by using a supervised repayment plan than you should file for bankruptcy under chapter 13.
Bankruptcy halts creditors on their tracks as the provision of automatic stay prevents them from indulging in collection related activities. It puts an end to harassing phone calls, lawsuits, foreclosures, and repossession. You can make a fresh start if you pay back a portion of your debts and this one big positive of bankruptcy filing under chapter 13.
Bankruptcy is a better choice for those with already poor credit scores because they have nothing more to lose but everything to gain as further lowering of credit scores does not impact them.
Consult a debt relief company to work out a suitable debt relief package for you.