Don’t be Fooled by the Hype
Bankruptcy laws are the only ones designed to protect you. There is a stark difference between bankruptcy, debt consolidation, debt settlement and credit counseling. It is the only guaranteed method to get you the fresh start you deserve.
Debt Consolidation:
Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan. Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, most commonly a house. In this case, a mortgage is secured against the house. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.
Because of the theoretical advantage that debt consolidation offers a consumer that has high interest debt balances, companies can take advantage of that benefit of refinancing to charge very high fees in the debt consolidation loan. Sometimes these fees are near the state maximum for mortgage fees. In addition, some unscrupulous companies will knowingly wait until a client has backed themselves into a corner and must refinance in order to consolidate and pay off bills that they are behind on the payments. If the client does not refinance they may lose their house, so they are willing to pay any allowable fee to complete the debt consolidation. In some cases the situation is that the client does not have enough time to shop for another lender with lower fees and may not even be fully aware of them. This practice is known as predatory lending.
Debt Settlement:
Debt settlement, also known as debt arbitration or debt negotiation, is an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full. As long as consumers continue to make minimum monthly payments, creditors will not negotiate a reduced balance. However, when payments stop, balances continue to grow because of late fees and ongoing interest.
There are many companies out there that advertise this type of service. It is important to remember though that you can still be sued by your creditors and joining a debt consolidation company does not stop those harassing phone calls like bankruptcy does.
The debt settlement damages your credit score and is reported on your credit report. A credit report is used by creditors to judge past credit performance to see if you meet their criteria for lending. Insurance companies uses a person’s credit report to determine premiums and prospective employers review the credit report to establish the character of a job candidate.
Another common objection to debt settlement is that debtors whose debts are partially canceled outside the bankruptcy system will need to report the canceled portion of the debt as taxable income. The IRS considers $600 or more of forgiven debt as taxable income. You will have to be provided with a 1099-C tax form. This form will list the amount of forgiven debt and interest.
The problems with debt settlement have been getting more and more national attention as we struggle through an ailing economy. MSN.com has published the following articles discussing debt settlement and its pitfalls:
Bankruptcy
Bankruptcy is the legal method by which you can discharge your debts and gain a fresh start. There are several bankruptcy options available and it is important to choose the one that fits your particular needs.
In a chapter 7 bankruptcy, the debtor agrees to liquidate all of their non-exempt assets to satisfy their debts. Chapter 7 is a liquidation proceeding. You turn over all non-exempt property to the bankruptcy trustee who then converts it to cash for distribution to the creditors. You will receive a discharge of all dischargeable debts usually within four months. It is important to remember, that in the vast majority of cases the debtor has no assets that he would lose, as most of is assets are exempt.
In a Chapter 13 bankruptcy you file a plan showing how you will pay off some of your past-due and current debts over a period of three to five years. The most important thing about a Chapter 13 case is that it will allow you to keep valuable property, like your home or car, even if you are behind on payments or you have equity not covered by your exemptions. Your payments on these secured debts will generally be your regular monthly payments plus some extra amount if you need to get caught up because you are behind.