Bankruptcy v. Debt Consolidation 

When you consolidate your debts, you essentially roll multiple debts into one lump sum help reducing the number of bills you are responsible for keeping up with.  In a debt consolidation, a new loan is used to pay off previous debts, leaving you to manage one monthly payment. In contrast, a bankruptcy is a federal protection law that helps individuals and businesses who cannot afford to repay their debts. Bankruptcy can be used to eliminate consumer debt and enables you to repay what you can through a court-approved debt repayment plan.  Although debt consolidation and bankruptcy share the common objective of debt relief, there are important differences. With a bankruptcy, you are not subject to the fees charged by private debt consolidation companies. Many debt consolidation companies will make sure their fees are paid first before applying your payments to your debts. Also, A FICO credit score of at least 600 and a low debt to income ratio below 40% are frequently required to qualify for a debt consolidation program. 

Bankruptcy v. Debt Settlement

A settlement is a deal you negotiate with creditors to pay less than the amount owed.  Although debt settlement doesn’t require a court filing and can often be handled without a lawyer, negotiating favorable terms with your creditors is not guaranteed and can take many months, if not years. In order to work out a payment plan or a settlement, many creditors require you to fall behind and further damage your credit.  In addition, many creditors refuse to work with debt consolidation companies. Convincing a creditor, or multiple creditors, to accept less than they are owed is not easy. 

Debt Consolidation and Debt Settlement Can Be Risky

Secured loans are the most common type of debt consolidation loan, and the ones to be most wary of. These loans require collateral, such as property or a vehicle, meaning that if you are unable to make the monthly payment, your home or car could be at risk.

Likewise, debt settlement arrangements have pitfalls as well. Creditors aren’t obligated to enter a settlement agreement and if they find out that you don’t have a lump sum to settle or cannot even afford an installment arrangement, they are more likely to start legal proceedings against you. Stopping payments to convince creditors that you are serious about not paying could result in your accounts going into collection, further damaging your credit as your debt increases.

Tax consequences are another important consideration debt settlement.  Creditors who forgive $600 or more of debt for you are required to file Form 1099-C with the IRS. This means that unless you qualify for an exemption, there will be state and federal taxes owed on the forgiven amount because it will be treated as income.  

Whatever your reason for exploring the possibility of debt relief, filing a Bankruptcy is almost always the quickest, most efficient way to eliminate debt.  Call us at 978-851-4000 to discuss your situation further and guide you toward the appropriate financial solution. We are conveniently located in Tewksbury near Rte. 93 and Rte. 495.  We service clients throughout Massachusetts.