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 Bach Law Offices, Inc.

Bach Is Your Financial Future.

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PO Box 1285, Northbrook, IL 60062

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The Difference Between Debt Settlement And Debt Consolidation

In this article, you will learn:

  • How debt settlement differs from credit counseling
  • How Debt settlement and consolidation differ
  • Why creditors are not obligated to accept a settlement offer
  • What to do if your creditor does not accept your settlement offer

Debt settlement is paying less than the actual principal balance on your loan. So, when you settle a debt, let’s just say I owe a credit card company $5,000, and I call up and I offer them a lump sum payment of $2,000, they’re not going to accept that for this purpose and they say “Okay”, they might accept it but it’s unlikely. But they say okay. I have settled that debt, so I am paying $2,000 instead of $5,000 in that hypothetical, and then I have a tax implication. I will get a 1099 for the remainder of the $3,000, and I owe taxes on it. That’s debt settlement. I’m paying less than what I actually owe. Debt consolidation is typically a loan, so you have a new lender who is going to lend you enough money to pay off all of your debts, or a large portion of your debts, and put it into one loan payment. It usually makes your monthly out of pocket less because the interest calculation and minimum payments. So, if you have a minimum payment on five different companies of a $100 a piece, but one company of $250, you’re now making a lower monthly out-of-pocket payment, but you’re not reducing your actual debt. You’re not going to have the tax implications the debt settlement has, but you have a new loan that’s a larger amount that paid off those smaller loans.

The Difference Between Debt Settlement And Credit Counseling

Credit counseling is a very specific thing. Credit counseling is coaching. It is helping you figure out what to do to get out of debt. In the bankruptcy world, the credit counseling is actually a specific course that every individual must take before they qualify, because the course is supposed to tell you if you have other options out there other than bankruptcy. Debt settlement is offering a lower payment than what you actually owe. So, not to repeat myself but if you have a debt settlement, you’re paying a lesser amount with the tax consequence; credit counseling isn’t paying anything, it is giving you advice and suggestions on how you can get out of debt and then you choose what path you want to take.

The Difference Between A Delinquent Account Status And A Default

A delinquent account is when you are behind in payments. A default is one step beyond delinquency. The best example I can think of would be a student loan where it has both terms in the body of a typical student loan. In the student loan, you’re delinquent if you’ve missed payments, but you’re not in default until you’re delinquent on loans six months later. They give you that grace period where you have time to get caught up before it triggers any alarms in their computer system. Once an account is in default, those alarms that I just referred to are things like send it to the collection agency, send it to an attorney, close out the account, and other things of that sort. It is the next step typically before it goes into a collection status.

Including All Credit Cards In A Debt Settlement Agreement

You can pick-and-choose what cards you want to put in a settlement agreement, but I could also say that debt settlement is a one-on-one situation. When you’re settling debts, you’re calling specific companies to negotiate a payment on their one specific account. So, if you have a card in good standing and you don’t want them to possibly close it off or increase your interest rate, you don’t have to involve it in a debt settlement.

A Creditor’s Legal Obligation To Accept A Settlement Offer

There’s no legal obligation for creditors to even consider a settlement offer. You are typically bound to a contract that incurred of the debt in the first place.

The Steps Available If Your Creditor Doesn’t Agree To Settle Your Debts

If a creditor doesn’t agree to settle a debt, you need to think about what your other options are. Debt settlement is one, and it’s not an easy thing to do. For example, maybe they would settle, but they’ll only take 80% or 90%, and there’s still too much on your budget, or maybe they want 50%, but 50% is still a large number and they only will give you six months to pay it. There’s a lot of things that can go wrong with the debt settlement, but then you look at other options, what are the other options. One option is you can just ignore it, let it go, let them file a suit, get a judgment, and possibly liens. While that is an option, it is not what I recommend.

Then you have the option of debt consolidation. Debt consolidation is a loan and one needs to be careful. Make sure when you look at the loan and you look at the paperwork before you take it out that you’re actually saving money. Sometimes it’s really appealing because I must pay $500 a month without the consolidation; with the consolidation, maybe it’s $350 a month, which is a big savings of a $150 a month. However, they might be charging you twice as much interest. So, you have to decide if it is better to have the smaller payment fit in your budget, but know that you’re going to pay significantly more by the time you’re done, or are you better off just paying the agreement you have already. You have a bankruptcy option to review, which is good for some, but not everybody. In the chapter 7 bankruptcy, you can potentially wipe out the debts completely. There are some exceptions, so I don’t want to say guaranteed that you wipe out debts completely. There is also a chapter 13 where you will pay some portion of the debts anywhere from a 10% to a 100% here in Illinois based on several factors, but it would be important to sit down and have a conversation with someone about bankruptcy before you would make that choice. You can settle it, consolidate, file a bankruptcy, or you just leave things alone.

For more information on Debt Settlement in Illinois, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (847) 440-5998 today.

Bach Law Offices, Inc.

Bach Is Your Financial Future.
Contact Us Today! (847) 440-5998