Individuals and families experiencing a difficult financial situation may wonder about the difference between a debt settlement, debt consolidation, and legal bankruptcy protection.
At a glance, debt consolidation is a process of combining all of a consumer’s debt from various lenders into one affordable monthly payment, which can stretch into years or decades while interest continues to accrue. Debt settlement is a process of negotiating debt down so that a consumer owes less overall, with the remainder often spread out into a similar repayment plan with interest. Bankruptcy protection is a legal process, which offers qualified individuals, families and businesses the opportunity to reorganize debt into an affordable repayment plan, discharge unsecured debt, protection from creditors, and a number of property exemptions that a filer may keep.
Debt Relief Programs
Debt relief programs often requires the consumer to stop making payments to their creditors and instead make payments into an escrow account set up by the consolidation company as they negotiate a settlement with various creditors. When a settlement is reached – often a 24 to 48 month process – the debt consolidation company will make a payment out of the available escrow account. Because consumers stop making payments to creditors during the process, debts will default which will result in a lower credit score. Some debt is not eligible for debt relief programs and companies charge fees, often anywhere from 15 to 25 percent of the enrolled debt which is typically added to the payment plan
Debt Consolidation Programs
Debt consolidation converts debts into one loan payment, simplifying how many payments a consumer has to make. These offers also might be for higher or lower interest rates than a consumer is currently paying depending on their credit score. Debt consolidation is reported on a credit report as long as it is open: any delinquent payments of 30 days or more will be reflected. Debt consolidation requires a fee for the service, typically 8 percent but the rate may vary. If a loan is consolidated with collateral, the lender will take possession of the property if a consumer is unable to keep up with payments.
Working with a debt consolidation or debt relief company does not offer the same protection against creditors as bankruptcy, a legal process which also provide an affordable repayment plan, debt forgiveness or discharge, and protection from creditor actions. There are a number of property exemptions available to filers – property they can keep outside of the bankruptcy. It is important to get information regarding the differences between debt consolidation and settlement versus legal bankruptcy protection to decide on the best strategy for a difficult financial situation. Contact bankruptcy attorney Charles E Covey for more information regarding Chapter 7, 11, or 13 bankruptcy today.