During these times of financial uncertainty, consumers may be facing some of the most difficult hardships they have ever endured. Out of desperation comes panic, decisions are made in haste, and then it hits them. "What have I done?" - The resounding quote after a person filed for bankruptcy unnecessarily. Then you have the bankruptcy lawyers telling you it's in your best interest to file chapter 7 or 13, the debt consolidation companies saying to go with them and they will reduce your interest, and the debt settlement guys telling you they will get rid of half of your total debt.... "So which one do I go with?" One might ask. The answer to this is dependent on your needs; please allow me to fill you in.
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Financially speaking, bankruptcy is an absolute last option. I will not say this is the worst case scenario for everybody but there are several options one should take advantage of first; due to the long term effects, duration of proceedings, negative impact on credit and possibility of not being selected by future employers. However, once completed, many lenders are very eager to offer credit almost immediately after the bankruptcy is discharged. Essentially, bankruptcy is the liquidation of assets in order to repay your lenders; the courts will negotiate on your behalf and offer sound financial advice to help you get back on track. Although, it is the courts decision, not yours- what they say goes.
Debt consolidation is a program which reduces ones interest rates and tailors the repayment to the consumers' budget. By giving you a loan for the amount of total debt the consolidation company is able to haggle lower than normal interest rates from your creditors. In turn, the consumer is able to stretch out the term for repayment, which is where the downside comes in. Debt consolidation can take several years while in the program. Also, average repayment is around 161% because the principle balances do not get reduced and some (if not all) report the consolidation on your credit bureau.
Debt settlement is a debt management program in which the consumer pays back substantially less than what is owed. On average a person could expect to repay around 55 percent, paid during a period spanning between 6 months to 4 years depending on the conditions. The debt settlement companies have experienced representatives that specialize in consumer and credit law. In order for the company to get the optimal settlement for you, they have to settle each account in full; which means cash is needed, right? Therefore, a savings plan is established by way of a trust or escrow account. The amounts are settled per account as the funds accrue, one at a time. The downside of this is that during the savings period, the creditors are not receiving funds (usually around 1-3 months) therefore reporting late payments to the creditors. As soon as these accounts are settled, they are reported as either "paid in full" or "settled in full" so in turn it is the fastest and least impacting form of debt relief a person can seek; just a bit of a waiting period for the first few months.
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