When you find yourself overwhelmed by a massive debt load, it can seem hopeless to try to get out from under it. Too often, people allow themselves to simply go farther down the rabbit hole as they continue to get deeper in debt while they struggle to make the minimum payments. If you find yourself no longer able to maintain your bills or struggling to maintain your lifestyle – it’s time to take action. Bankruptcy, debt settlement, and debt consolidation are financial tools that individuals can use to regain control of their finances. However, it can be difficult to know which one is right for you. Your best option likely depends on your specific situation, debt load, and ability to pay back what you owe. Keep reading to discover details about which option is best for you so that you can create a game plan for financial success.
What is a Bankruptcy?
When you file for bankruptcy, you can choose a Chapter 13 or a Chapter 7 bankruptcy. Regardless of which you choose, you will have to file for a bankruptcy through the court system and then take your case to court. The experienced bankruptcy attorneys of Sadek Bankruptcy Law Offices will help you determine which bankruptcy type is best for you and then guide you through every step of the bankruptcy process.
In a Chapter 13 bankruptcy, you will likely have to pay off most of your debts, although some unsecured debts such as credit cards may be wiped off without being paid in full, through a predetermined payment plan. In a Chapter 7 bankruptcy, certain parts of your belongings may be sold to cover what you owe, but the rest of your debt is wiped clean. Giving you a fresh start with no monthly payments to pay or creditors to worry about.
What is a Debt Settlement?
In a debt settlement, you are working directly with your creditors to create a plan that will work best for you to repay your debt. You try to talk the creditors into lowering your payments into some that are more manageable. While creditors are not required to work with you, the fear of you potentially filing bankruptcy is likely to encourage them to go on with a settlement.
If you have the ability to gather a large sum of money together fast, you can also offer it to your creditors as repayment, asking them to do away with your debt entirely and encouraging them to be happy with what you can pay them now. For instance, if you own $10k and can come up with a lump sum of $5k, your debtors might be willing to accept it and write off your debt rather than risk having you file for bankruptcy where they will get little to nothing.
However, there are many debt types that are hard to settle or that creditors will take their chances and won’t negotiate with you one – making bankruptcy a superior and faster choice from the start.
What is Debt Consolidation?
If you owe multiple avenues of debt, it can be overwhelming to keep up with the different payments and also cover the interest that is accrued by each on a monthly basis. You may have heard the many radio and TV ads advertising combining all of these loans into one – that is what debt consolidation is. Many people find themselves simply paying growing interest payments for years rather than actually paying down their balance due to high loan amounts and high-interest rates. If you choose to consolidate your debt, it simply means that you are lumping all your debts together into one manageable payment where you can lower your interest rate and potentially start to actually chip away at the balance.
When you choose to pursue debt consolidation, you will likely need the help of a credit consolidation program or a debt consolidation loan. Depending on how much you owe and your credit score, you might be able to do this simply by transferring your balances to one low- or no-interest credit card or consolidation program.
But before you rush to relieve yourself from having to log into multiple portals to make several loan payments a month, consider what might you lose by consolidating? For example, if you consolidate your governmental student loans, you lose benefits like hardship pauses, the ability to change your repayment plan type, and any benefits from future student loan forgiveness plans. By consolidating, you basically start a new loan to a bank and forgo any previous benefits or terms you may have enjoyed under your old agreements.
How Each Path Can Impact Your Credit
Your credit score is a fragile number that can change with ease. Understandably, when you try to start navigating debt and paying off what you owe, you may see this number drop before it rises.
- Debt consolidation is likely to give the least hit to your credit score since it is based on simply transferring what you owe to a lower-interest option. In fact, when you consolidate your debt, you may see your score start to rise if you can crack down and stop collecting more debt as you go right away.
- Typically, bankruptcy may have a very short-term negative impact on your credit score, however, so long as one is able to steer away from any new debt, an increase of 50 points or more is likely within a year after filing. The bankruptcy also may remain on your credit report for 7-10 years. While this won’t hold you back forever, it can be challenging if you plan to make any big purchases in the near future.
- Likewise, a debt settlement will also impact your credit score for around 7 years. While it won’t hit your score as hard as a bankruptcy, it can still take off around 75-100 points.
Which Eliminates Debt the Fastest
When you’re drowning in debt and you decide it’s time to break free, you will likely want the course of action that will do away with what you owe the fastest.
- A debt settlement may be a good way to do away with debt if you can collect a lump sum to pay off some of what you owe, but that can take time as you work to gather the money for the payoff. If you are simply trying to lower your payments, you may find that a settlement actually ends up settling you with more debt than when you started and only draws out the process.
- Debt consolidation can help to do away with your debt within 3-5 years if you stick to a strict repayment plan with no additional expenses.
- Meanwhile, bankruptcy is typically the fastest way to get out of debt. With a Chapter 7 bankruptcy eliminating all debt within as little as 3 months. While a Chapter 13 bankruptcy can do away with it all within 3-5 years.
Chapter 7 Bankruptcy Does Away with Debt Entirely
For many people who have few possessions, a Chapter 7 bankruptcy can be the best option to do away with debt. While a Chapter 7 bankruptcy does result in a hit to one’s credit score, it sets individuals completely debt-free in as little as 60-90 days. And, oftentimes, the credit hit is not as significant as filers imagine as their credit scores have already been majorly impacted by late payments and their heavy debt loads. If you don’t have expensive belongings – like rental properties and multiple cars – you can also expect to have few of your personal possessions liquidated.
Additionally, in all of the years that Sadek Bankruptcy Law Offices has served clients, we have not once had a client forced to liquidate an asset they wanted to keep. When you are done with your Chapter 7 bankruptcy, you will be completely financially free, given a fresh start, and ready to rebuild your credit score in as little as 18-24 months!
Choosing the Option that’s Best for You
When you’re in deep debt, it can be hard to know the best course of action to follow. Choosing between a debt consolidation, debt settlement, or bankruptcy depends completely on your specific situation and what will help you find the greatest financial freedom in the best amount of time. An attorney can help you understand what your options are and how each choice can impact your life. Contact our office today to speak to an attorney who will review your case and help you choose the option that will set you free from your financial shackles!