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What Are My Debt Resolution Options?

What are all of the pros and cons of each debt resolution or debt consolidation option?

What are all of the pros and cons of each debt resolution or debt consolidation option? How will each affect my credit report?

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Updated: Sep 23, 2014

debt resolution options as puzzle pieces together
Highlights

  • Learn about debt resolution.
  • Compare different options for resolving debt.
  • Understand the pluses and minuses of each approach to resolving debt.

There are a variety of debt resolution options available.

To find the right one, you need to carefully weigh why you got into debt.

You also need to understand how each debt resolution option works, so you can find the solution that's right for you.

When comparing different options, pay attention to:

  • The size of the required monthly payment
  • How long it takes to become debt free
  • The total costs to pay off all your debt.
  • How your credit rating is affected

Credit counseling is a very common form of debt consolidation. There are many different companies that offer credit counseling services.

A credit counseling agency will often be able to lower your monthly payments by getting interest rate concessions from your lenders or creditors. Because the main benefit of the program is reduced interest rates, it less effective if your interest rates are already low.

In a credit counseling program, you are still repaying 100% of your debts, plus interest, though your monthly payments should be lower.

On average, most credit counseling programs take around five years.

While most credit counseling programs do not impact your FICO score, being enrolled in a credit counseling debt management plan does show up on your credit report, and, unfortunately, many lenders look at enrollment in credit counseling akin to filing for Chapter 13 Bankruptcy. It is, after all, using a third party to re-organize your debts.

Debt settlement, also called debt negotiation, is designed for people with a serious financial hardship. The hardship makes it so they either cannot pay their bills or are about to start falling behind.

Monthly payments in a debt settlement program will be lower than in credit counseling and usually far lower than what you're paying each month in required minimum payments to your creditors.

Debt Settlement programs typically run around three years. Keep in mind that during the your debt settlement program, you are not paying your creditors.

This means that a debt settlement solution of debt consolidation negatively impacts your credit rating. Your credit rating will not be good, at a minimum, for the term of your debt settlement program.

However, debt settlement is usually the fastest and cheapest way to debt freedom, with a low monthly payment, while avoiding Chapter 7 Bankruptcy. Debt settlement cuts your total debt, sometimes by over 50%.

The biggest trade-off in debt settlement is accepting a negative credit rating, for a period of time, versus saving money.

Many people think first of a debt consolidation loan when seeking debt consolidation.

In a debt consolidation loan, you exchange one loan for another, usually with the goal of a lower monthly payment or lower costs over the life of the loan.

You may take out a secured consolidation loan, or taking out a second mortgage or home equity line of credit. A cash-out refinance which carries a lower interest rate and is tax deductible can be a smart way to pay off high interest rate credit card debt.

It is important to be aware that shifting unsecured debt to secured debt can create a volatile situation. If there is ever a time that you can't afford the new mortgage payment, you put yourself at risk of foreclosure!

Unsecured debt consolidation loans are another option. Rates are generally far higher than on a secured loan. Shop for unsecured debt consolidation loans at banks, credit unions, or . Contact multiple lenders, to comparison shop for the best deal.

The rates you'll find on unsecured loans are primarily based on your credit score. You need an excellent credit score, over 740, to get the best rates.

If your credit is not excellent, but is improving and you're having trouble finding a loan, speak with one of the consultants at

Bankruptcy may solve your debt problems. It is a severe option, but is the best option for some people.

A Chapter 7 bankruptcy is a traditional liquidation of assets and liabilities, and is usually considered a last resort.Since bankruptcy reform went into effect, it is much harder to file for bankruptcy chapter 7.

You may only qualify for a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, your debts are reorganized. The debts are repaid, according to the terms established by the bankruptcy court. Chapter 13 bankruptcies usually run three to five years.

If you are considering bankruptcy, I encourage you to consult with a qualified bankruptcy attorney in your area.

You may be curious what may happen if you do just stop paying your creditors and take no other action. If you stop paying your unsecured debts, creditors have the right to collect the debt.

First, you will likely receive collection calls and letters directly from your creditors. If you are still unable to pay the debt after several months, the creditor is likely to refer the account to a third-party collection agency.

Third-party collectors are known to be much more aggressive in their collection tactics than original creditors. Don't be surprised if the collection calls become more persistent, or even threatening.

Thankfully, the has rules governing the behavior of collection agents. However, unscrupulous debt collection agents do not follow these rules.

In some cases, when all other collection efforts fail, a creditor will decide to sue you. This is not a frequent occurrence, but it is within a creditor's rights and is a possibility about which you should be aware. If one of your creditors sues you for a debt you defaulted on, the court will likely issue a judgment in the creditor's favor.

Depending on your state's laws regarding the enforcement of judgments, the creditor may be able to garnish your wages, levy your bank accounts, place a lien on your property, or take other action to enforce its judgment.

Regarding a credit report, default damages a credit score severely. In addition, default is a warning flag for many lenders, who will refuse to deal with a potential customer with a default on their record. As a result doing nothing and allowing default is a poor option for most consumers.

Summary

There are many forms of debt consolidation, Each consumer is different, so find the debt consolidation option that fits for you.

Here are some fast tips for your own quick Debt Consolidation Evaluator:

1. Look at consolidating debt in a mortgage refinance, if you have strong credit and have equity in your home.

2. If your primary debt problem is high interest on your credit cards and you can afford a to pay about 3 percent of your total debt each month consider Credit Counseling.

3. Consider debt settlement if you want the lowest monthly payment, to get debt free for a low cost and short amount of time, AND you are willing to deal with adverse credit impacts and collections .

4. Seek a bankruptcy consultation, if you can't meet your monthly payments and can only afford less than 1.5 percent of your total debt each month.

Bills.com makes it easy for you to .

I hope this information helps you Find. Learn & Save.

Best,

Bill

35 Comments

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  • AS
    May, 2014
    ahsan
    I am a Canadian residing in Chicago temporarily. I opened a bank account with Chase here showing them my Canadian passport and driver's license and they opened an account for me without a US Social Security number. There was a fraudulent transaction of about $2,000 USD for which the bank holds me accountable. I have no means to pay that kind of money as I am just a student and I do not work either. Is it possible for Chase to report it to my Canadian Credit, which is good? I have not provided them with my Canadian social security number but they have my passport and driver's license from Ontario. Please help me if there are any options for me.
    0 Votes

    • BA
      May, 2014
      Bill
      There is no law in the US or Canada I am aware of that prevents the exchange of payment information between US creditors and Canadian credit reporting agencies. However, the US and Canada have different credit reporting laws, so as a practical matter Equifax, Experian, and TransUnion do not make wholesale transfers of consumer data about US-Canadian residents between the two countries today.

      It is possible this policy may change if the two countries ever harmonize their consumer credit reporting laws, or if the big-three find a way to deal with the different laws and stay on the right side of law in both countries.

      If your Chicago bank has a branch in Ontario, it is possible that if you return to Ontario, the Ontario branch may be transferred your problematic account. If that happens, then the Ontario branch may report your delinquent account to the Canadian credit reporting agencies.
      0 Votes

  • KM
    Dec, 2013
    K.W.
    I'm having a bit of an issue with a creditor for student loans, which is no one's fault but my own. I am currently unemployed but beforehand the creditors were garnishing my wages & since these are not federal loans I've been advised they could not be consolidated. I have no idea where to go from here. Is there a way out of the garnishments when I get back into the workforce?
    0 Votes

  • ES
    Nov, 2013
    Erica
    I owe $5,599 to a motor credit company. I do not have that kind of money, and can barely pay my other three credit card debts. Would debt consolidation be my best answer? I am afraid they will go after my paycheck.
    0 Votes

    • BA
      Dec, 2013
      Bill
      You mentioned a $5,599 balance due to a "motor credit company." If this is a car-purchase or title loan, in other words the loan is secured by your car and the lender has the right to repossess the vehicle, then you have a complicated situation. Talk to a reputable debt settlement company about your accounts to learn whether the $5,599 account can be included in a debt settlement program.
      0 Votes

  • JC
    Aug, 2013
    Jonathan
    I have a $15,000 credit card debt and just got an offer from a collection agency to settle it if I only pay 15% of the total, which seems like an insane deal. But as far as I understand, it is past the 4 year statute of limitations for California, and that it won't necessarily improve my credit score much since it stays on my record for 7 years anyways. I also have another $5,000 debt from a different credit card company that's past the SOL as well.

    I've read your articles about the SOL and know they can still sue, etc. but I guess I'm wondering if it's worth paying this settlement amount even though it may not improve my credit score much? Thank you for all your information.
    0 Votes

    • BA
      Aug, 2013
      Bill
      Two contradictory answers to your question:
      1. The Fair Isaac & Co. FICO scoring model does not reward you for paying off delinquent debts. Once the delinquency hits, the damage is done, period. Only time can heal a wound in the FICO world.
      2. VantageScore 3.0, which was released in the spring of 2013, removes the damage caused by a delinquency when the account balance is paid or resolved. VantageScore rewards the conscientious.

      Few lenders use VantageScore. In fact, if you're looking for a mortgage or refinance, virtually no home loan lenders pay attention to VantageScore.

      Is it worth your while to rid your self of the debt? From a credit score perspective, the answer is no. A settlement will remove your legal liability for the debt, which may make you sleep easier at night knowing you will not receive an unwelcome telephone call from a collection agent in the morning.

      0 Votes

  • BG
    Jul, 2013
    Beth
    We have about $30,000 in credit card debt, and are thinking of debt consolidation. We can barely make the monthly payments, let alone make the payments on our other expenses. What happens after you are enrolled in debt consolidation and we would need to charge something, such as car repairs or school fees for kids, or anything else that we wouldn't have the money for?
    0 Votes

    • BA
      Jul, 2013
      Bill
      You do not need to enroll all of your credit cards in either a debt settlement or credit card counseling program. It is common for people enrolled in either type of program to leave one card out — one with hopefully a zero or low balance.

      In an ideal situation, you would create thorough and accurate household budget that would include a reserve for the expenses you mentioned.
      0 Votes