Bankruptcy is not necessarily the villain of a debt recovery story. At times, it can be the right solution that gives a consumer a chance to start over. However, like all debt relief options, there are pros and cons. Comparing bankruptcy to these other options can help you assess the best solution for your situation. Here are the differences between bankruptcy, debt settlement, debt management and debt consolidation.
What is bankruptcy?
Bankruptcy laws give those who have more debt than they can repay protection from creditors and a chance to eliminate their debts. Depending on the type of bankruptcy filed, you can discharge unsecured debts entirely or enter an organized repayment plan. There are several types of bankruptcies, but Chapter 7 and Chapter 13 are the most common forms that consumers can file. Chapter 11 is an option for those with a large and complicated cases. Read the articles below for a explanation of the differences between different kinds of bankruptcy.
A look at debt settlement
Debt settlement allows you to negotiate with creditors to pay off debt on delinquent, unsecured credit accounts and personal loans over a specified time (or all at once) for an amount less than you owe.
Negotiating a debt settlement usually happens when you’re several months past due on your payments. You’ll need to tolerate collection agency calls and the potential for lawsuits, but debt settlement can be a good and fairly quick option for people who have the money to pay creditors through a payment plan that lasts no more than a couple of years. If your finances are too tight, or your income isn’t reliable, this may not be a good option. Review the pros and cons of debt settlement.
What is a debt management plan?
A debt management plan (DMP) is a sponsored repayment plan managed by a credit counseling agency that negotiates reduced interest rates on your unsecured debts and creates a pay-off plan. The DMP requires that you make fixed monthly payments for up to five years. These payments go directly to the agency and they distribute them to each of your creditors for the accounts enrolled in the DMP. Your monthly payment also includes a fee for the agency’s services, which is nominal and capped by state laws.
When you know that you’ll have consistent income over the next five years and the monthly required payments fit within your budget, this plan may work for you. It’s wise to have a savings account so that if an emergency arises, you’ll still make your monthly DMP payment.
If you’ve not yet fallen delinquent on your accounts, or have perhaps only missed a payment or two, this is an option to consider in order to protect your credit. But, if you miss just one payment, you’re out of the program and all negotiated terms are nullified. Learn more about how to find the right debt management plan.
A look at debt consolidation
Debt consolidation usually means taking out a large loan from a creditor to cover the balance of all your existing loans and credit cards. The loan could be a personal loan from a bank, a peer-to-peer loan or, in some cases, a home equity loan. Sometimes it can be accomplished through a balance transfer.
The goal is to get favorable terms that include a much lower interest rate than you’re paying on your multiple accounts, giving you the chance to reduce what you owe and pay off debt in a reasonable time. If you’ve not yet fallen behind on your accounts, this approach can help protect your credit score. If, however, you have challenges reigning in spendthrift behaviors, you may find yourself continuing to use your paid-off accounts and getting deeper into debt. Here’s what to look for when considering a debt consolidation loan.
|Bankruptcy||Debt Settlement||Debt Management||Debt Consolidation|
|Negative Impact to Credit||Yes||Yes||No||Not if consolidate before delinquency|
|Affordable||Chapter 7 is most affordable||Yes, if negotiated well||Yes – fees are capped||Yes, if consolidation loan has good terms|
|Quick Resolution||Chapter 7 is fastest option||Ideally complete in 2 years||Within a few years||Depends on terms|
|Potential for Lawsuit||No||Yes||No||Not if consolidate before delinquency|
|Payments managed by 3rd Party||Yes for Chapter 13 and 11||No||Yes||No|
|Risk of Failure||Nearly 70% failure for Chapter 13||Fairly low risk with guidance from an expert, and when your monthly cash flow is consistent.||Yes because plan does not allow for missing even one payment||If spending behaviors continue, this option can lead to more debt|
Assessing your options
Whether you’re considering debt settlement, debt management, debt consolidation or bankruptcy, we can help you understand what each of these options means for your personal financial situation and how you can get back on track.