Ben Todd | Jun 3, 2017 | 2
Best Options For Dealing with Huge Debt: Consolidation, Management, Settlement And Bankruptcy
If you have a high amount of debt and you are starting to worry that you will be in debt all the way up to retirement, you may like to consider your options. This article covers a series of very serious but effective options you have. It covers consolidation loans, and it covers the use of a management company. It covers the use of two types of debt settlement companies, the types that lend you consolidation money, and the types that chase discounts on your current debt. Finally, this article covers bankruptcy, which is usually the final option for people in desperate need of a way out of debt. The options listed on this article are pretty ugly, but they are not all bad, which is why a pros and cons section has been added to end of each section.
You may get a consolidation loan from your bank or from a specialist company. Your bank may consider giving you a consolidation loan if you can show how much you are paying on debt and you show that you can afford it. If you can clearly afford the amounts you are paying in debt, and if you have a good job, and you can detail where you have lived for the last three years, and if you are able to afford your debts while still having disposable income, then your bank may consider giving you a consolidation loan.
A consolidation loan is a very good way of significantly lowering your debt if you have credit card debt. If you have other types of debt such as trade card debt, store card debt, overdraft debt and personal loan debt, then a consolidation loan may not be a good option for you. Consolidation loans work best on credit cards that have been maxed out and where you are wasting money each month by only paying off the interest and nothing more.
If you use a consolidation loan to pay off something such as two or more personal loans, then you may be increasing your debt amount for no good reason. Unless you are struggling to make the payments each month and you want more disposable income, then you should probably keep your two personal loans and pay them off. It will take you longer to pay off the consolidation loan than it will to pay off the two personal loans (in most cases).
The Optional Benefits Of Consolidation Loans
Consolidation loans may get you out of debt that is slippery and very difficult to get out of–such as credit card debt. You may also use consolidation loans to increase the amount of disposable income you have at the end of the month. If you are paying a large sum on all your debts at the end of the month, you may consolidate those debts and make your consolidation loan repayment amounts less than what your combined debt amounts/payments are.
You may alter the timeline of your debt repayment. You may decide to consolidate your debts and pay more on your consolidation payments than you did for your debt payments. You may do this to pay off your debt a little earlier. You may do this because of the other benefit that consolidation loans offer, and that is the benefit of better interest rates.
The interest rate on your consolidation loan may be better than the interest rate on your current debts. If the company lending you the money is happy that you are going to use the money they lend to pay off your debts, they may give you a great deal on your loan and offer a low interest rate that saves you money in the long run. Your consolidation loan may also allow early repayments where your other debts may not.
- You may get a better interest rate on your debt as a whole
- You may alter your timeline and debt repayment schedule
- Your consolidation loan may get you out of difficult-to-escape debt
- It may improve the amount of disposable income you have
- It may not penalize early repayments
- Your total amount of debt may go down if you repay earlier
- Your total debt may go down if your interest rate is very good
- You are in charge of what you do with the consolidation loan
- Your loan may land you in debt for much longer
- The amount of your debt may rise significantly
- The interest rate on your loan may be deceptively attractive
- Getting a consolidation loan is difficult it you have a poor credit rating
- Some consolidation lenders have horrible interest rates
- Some loans are not large enough to cover all your debts
Debt Settlement Companies And Consolidating Companies
There are two types of debt settlement company. There are ones that act like debt consolidators and ones that simply negotiate discounts on your current debt so you can use your own money to pay it off right away. First, we discuss the consolidators, and then the discount-chasing settlers.
The companies that claim to consolidate your debt are doing so for a handsome profit in many cases. Usually, they consolidate all of your debts by paying them off so that you owe one large sum to them only. Some companies offer you the loan itself, and others will work on your (and their) behalf to lower your debt, pay off your creditors, and take the burden of all your debt on themselves.
A clever debt settlement company may be able to approach your creditors and get them to agree to lower your debt if they pay it off right away for you. The company consolidates the debt, knocks a little off what you would have paid, and keeps the profit that will eventually be made when you have repaid the loan.
What they will also do is mess up your credit rating by having it show that a debt consolidation or debt settlement company worked on your behalf. This makes it harder for you to get into more debt, which increases the debt consolidation company’s chances of being paid in full (eventually). They mess up your credit rating even more than it was, but it is in your best interest at this stage.
It Is Okay To Have Mixed Feelings About Debt Settlement Companies
Debt consolidators and settlement companies may reduce the amount you pay in debt, and they may not, but it really depends on how you look at it. If you were struggling with your current level of debt to the point where it was going to take years to pay off, then at least a debt consolidator will give you an end date.
On the other hand, if you were managing your levels of debt, but you were struggling and suffering, then a debt consolidator may reduce your monthly outgoings while adding years to your debt repayment.
Debt settling companies and debt consolidators are taking a massive risk by taking you on, and they do make a lot of money, even though it seems like they do not.
If they pay off your creditors personally, they are able to pay far less than what you may have paid because they are paying your debt off in one lump sum and are avoiding lots of interest. In addition, they are often able to scare creditors into settling with them for less because they say that you are close to going insolvent or bankrupt without their help.
One Big Problem With Debt Settlement Companies
There are some that act more like consolidation companies. They consolidate your debts and settle them by paying them. That way, the only company you owe is them. That is one way they work, but the other way that some of them work is more distressing. They are the discount-hunting settlers.
Some work by going around your creditors and striking deals for you to pay off your debts right away. You have to pay off the debt in full right away, and the debt settlement company arranges discounts and charges you a fee. You have to have the money to hand right away in order to take advantage of the discounts that the debt settlement company creates, and that is not an option for most people in debt.
- They may lower your monthly outgoings
- They may help stop you going bankrupt or insolvent
- Such companies may lower your amount of debt
- Such companies are able to get you out of a lot of trouble
- They may be your last resort before bankruptcy
- They may give you an end date for your massive debt
- Debt settlement companies are no longer allowed to charge up-front fees
- Few will take on your car loans
- None will take on your student loans
- They will not work to settle your mortgage debt
- They may increase your levels of debt
- It is possible that your debt will last longer
- The settled amount may count as taxable income
- Some insist on you having the money to settle the debts
Debt Management Companies
These do not lend you any money, nor do they get you discounts on your current debt so that you may pay it off for less. What they firstly do is look at your budget, look at you debt, and then tell you how to manage your money. For example, if you have debt A, B, C, D and E, they may point out that you should pay off debt D first because it is the smallest, and then debt A because it has the highest compounding interest rate.
There are also some credit companies that have pre-set arrangements with debt management companies. They offer slightly better interest rates with the understanding that the debts will be paid a little quicker.
Your money is put into the hands of the debt management company, and they pay your debts at the agreed rates that your creditors decide. If you are behind on your debts and you cannot afford the minimum payments on some or all of your debts, then a debt management company is probably a good thing for you.
All of the services/options listed on this article deserve a fair amount of shopping around. Do not be foolish and choose the first offer that comes your way. With that said, debt management companies require the most shopping around.
The quality of one debt management company may far exceed the quality of another. One may have a glancing effect on your debt where another may stab at the heart of your debt and create significant changes. If a company has especially skilled negotiators and numerous special deals with creditors, then they may have a far bigger effect than a company with little influence may, poor decision makers, and terrible negotiators.
What Is The Catch?
The debt management company is going to charge you a fee for their service. They take your money at the when you are paid and they pay your debts for you. They also take a fee from you that will vary from company to company.
The idea is that they will save you so much in interest that the amount you pay them will be absorbed by your savings. However, that is not always the case and there are people who are paying their debt management company more than they were paying in debt payments before meeting the management company.
Another catch is that a debt management company will negatively affect your credit rating in the same way that a debt consolidator negatively affects your credit rating. The only problem is that a debt consolidator/settler damages your credit rating and it may do you some good by keeping you locked in with just one loan.
However, with a debt management company, a knock to your credit rating may do you no favors when you dump your credit management company and have to negotiate with your creditors yourself.
- The fees they charge may be absorbed by your interest savings
- They may help you make payments that you would have otherwise missed
- The company will handle your debt repayment schedule
- They will not miss payments by forgetting them
- Some are able to lower the APR on all your debts
- They will hit your most expensive debts first
- The company charges a fee that may add to your monthly outgoings
- Their negative effect on your credit rating may have nasty results
- Their effect on your credit rating may last longer than you expect
- Some of the things they do you could have done yourself
- The quality of one company may vary wildly from the next
Should You Go Bankrupt?
It is not the get-out-of-jail-free card that some people think it is. Some people think they are able to rack up thousands in debts and then avoid paying it back by going bankrupt, and that simply isn’t the case.
Bankruptcy is a court supervised proceeding where they arrange a five-year repayment plan. If you are still stuck in debt that you will be in beyond your retirement years, then you may qualify to have your debts eliminated altogether. Remember that your secured debts will not be cleared, your secured assets such as your house, insurance policies, etc., will be taken as payment for your debts. Only your unsecured debt such as your credit card debt will be wiped.
Bankruptcy Is Very Difficult
You are not simply let off the hook. There is an epic amount of paperwork and legal work to do. It is a very costly endeavor, and the court is going to make you live in poverty for five years while it forces you to pay off as much debt as you can. If by the end of the five years you have made a dent in your debt, they may not allow you to go bankrupt. You have to spend between three to five years in poverty while a big slice of your income goes on your debts.
When your creditors get wind of you going bankrupt, they will rush to get judgments on you and turn your debts over to collections. Your creditors will aggressively pursue you and this may continue during the five years you are forced to pay back your creditors (even though it is against the rules for them to try). Things can get rather nasty, and if you think you can just sit on government benefits without a job for five years, then think again, because it you are not trying to repay your debts, you may not be allowed to go bankrupt (since it costs money and your government aid for lawyers will soon run dry).
The image below shows the difference between chapter 7 bankruptcy and chapter 13 bankruptcy. Since 2005, it has become very difficult for people to become bankrupt, and since that time, two forms of bankruptcy have come into effect (as seen in the image below).
- You may be able to wipe your debts and start again
- If your credit rating is already awful, then bankruptcy may improve it
- An automatic stay is ordered on all collections efforts against you
- An automatic stay is ordered on all litigation efforts against you
- Your 401k cannot be touched
- Your bankruptcy lawyer will charge a small fortune
- You may have to pay your creditors most of your income for up to five years
- You cannot just sit around and wait for five years
- Your credit rating will be tarnished forever
- Your assets will be stripped and you are left with nothing
Conclusion – They All Have Their Good Sides
The worst and more horrid option is obviously bankruptcy because it is harrowing, difficult, expensive, and may leave you with nothing. Yet, for me, the worst part is the fact your credit rating is ruined for years after, but if you are already in a situation where credit companies are getting judgment after judgment on you, then bankruptcy will actually improve your credit rating over time. Being in massive debt is truly awful, especially when you already have mortgage debt, student loan debt and vehicle debt.
Final Comment From All Of Us At eCheck
Debt is horrible, and the options listed in this article may give you a way out, but none of them are patricianly pretty.
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