Why is Bankruptcy Often Preferable to Debt Settlement and Consolidation?
When you’re facing crushing financial problems, you should explore all possible legal options for debt relief. But things can quickly get confusing with all the information (and misinformation) out there about debt consolidation and debt settlement. While these remedies can sometimes be useful alternatives to filing for bankruptcy, they may not be as effective in solving your monetary crisis.
To begin with, debt consolidation and debt settlement are not the same thing. Here are the two scenarios:
- Debt settlement — You pay a company to negotiate with your creditors and to settle your debt for less than the amount you owe, thereby reducing your total debt.
- Debt consolidation — You take out a single loan that rolls all of your existing debts into one, so that you make monthly payments to one creditor at one interest rate. This could lead to a better interest rate and to a lower payment amount.
Debt consolidation and settlement each have potential negatives to be aware of:
- Debt consolidation requires a fairly good credit score to qualify for the refinancing loan and you’ll need to have sufficient income to make the monthly payments.
- Third-party debt settlement companies will often tell you to stop paying credit cards, which can lead to late fees and additional debt.
- Delayed or missed payments under a debt settlement plan can drastically hurt your credit score.
- In debt settlement, the amount of debt forgiven counts as taxable income.
- Lenders are not obligated to work with you to settle debt.
- Consolidation or settlement can take more than a year to complete.
A Chapter 7 bankruptcy, on the other hand, potentially offers several advantages over debt consolidation or debt settlement:
- The process could be finished in as little as six months, which can be far quicker than debt settlement.
- All collection agencies must stop harassing you immediately.
- You walk away with virtually no unsecured debt. With some exceptions, it is discharged.
- The discharge allows you to get a fresh start and begin rebuilding your credit quickly.
The decision to go with bankruptcy, debt consolidation or debt settlement requires careful thought, as there are many variables to consider that are unique to each person. The best way to analyze your best options is by consulting with an experienced California bankruptcy and debt relief lawyer.
At my law firm, we do not outsource debt settlement work to third-party companies. If this option is the right one for you, all work will be done by our team in-house. This helps protect you from unscrupulous debt settlement companies.
The Law Offices of Michael Jay Berger in Beverly Hills is dedicated to helping people escape the burden of overwhelming debt. I have decades of experience in bankruptcy law and would happy to meet with you to discuss debt relief options. Please call 310-271-6223 or contact us online to schedule a free consultation.