Debt Settlement. Debt Consolidation. Bankruptcy. Which is Right?

When a consumer is challenged with too much debt, there are primarily three strategies that can be pursued. Each strategy has its pros and cons. The multiple options available to consolidate or eliminate debts can be quite confusing and include credit counseling programs, debt settlement, debt consolidation loans, and bankruptcy.

The three main strategies to deal with debt issues are:

  1. Debt Consolidation
  2. Debt Settlement
  3. Declaring Bankruptcy

Debt Consolidation

Debt consolidation is a reorganization of the debt through a credit counselor or taking a debt consolidation loan to pay off the debts in full (leaving the consumer with one debt, the consolidation loan balance.


A. Debt consolidation loans allow people to consolidate many debts into one loan with one payment each month.

B. Generally, interest charged on debt consolidation loans falls far below the interest charged on most credit card debt allowing easier repayment of the debt.

C. 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.

D. The company providing debt consolidation requires that the consumer sends that company one lump sum payment monthly which they will disperse to the creditors you enrolled on your account when joining.


A. These loans, in most cases, rely on a debtor's home for security making them available only to homeowners.

B. Although the monthly payments can often be lower, the total amount repaid is often significantly higher due to the long period of the loan.

C. These types of loan options usually come with heavy application fees and they convert all unsecured debts into a secured debt which is now backed by a home. If the consumer falls behind on the loan payments he/she risks losing the property.

Debt Settlement Strategy

First – know the law: The Fair Debt Collection Practices Act protects the consumer,

There are debt settlement companies and also there are attorneys that specialize in debt settlement. Debt settlement is where the consumer's agent contacts the creditors and attempts to negotiate a reduction in either the debt or the interest rate. Unlike debt consolidation, unsecured debt is not "shifted" to secured debt, but is eliminated through a settlement or payment plan. Firms who perform this type of work may identify themselves as debt management, debt reduction, debt relief, debt workout, and debt settlement. Debt settlement/negotiation can help you get out of debt for the least amount of money in the shortest amount of time without filing for bankruptcy


A. Anyone may use debt settlement firms regardless of their home ownership status or credit.

B. Most of debt settlement firms set their goal at reducing the consumer's debt down to 30-50 cents on the dollar through their efforts.

C. The debts can be settled in full.

D. Creditors agree to debt reduction arrangements where they feel a settlement of the debt will be in their best interest. In most cases they come to this conclusion because the person requesting the debt negotiation appears to be a legitimate candidate for bankruptcy.

E. Most settlements take from 3 to 5 years per creditor.


A. If the consumer still has good credit, allowing debt to settle in this way may save the consumer money, but it leaves his/her credit score in very bad shape.

B. Each creditor will have a different internal debt settlement policy, making negotiations with all creditors a tedious and drawn out strategy.

C. Creditors do not take the situation nearly as seriously when a debtor calls to make a settlement as when a debt relief professional, such as a bankruptcy attorney or debt management firm calls to make a debt settlement.

D. Some debt relief firms may require the consumer to accumulate money by placing it in an escrow account controlled by the debt relief firm.

E. Debt management firms cannot stop creditors from collection efforts or lawsuits during the process. A debt management firm cannot represent the consumer in court.

F. Debt reduction firms cannot guarantee their results.

Selecting a Debt Settlement Firm

When selecting a Debt Settlement company to work with, here are some things to take note of:

The company has been in business a minimum of 2 years. The Debt Settlement plan takes no longer than 3 years to complete. The company requires your direct participation versus doing everything on your behalf. Most important, the company is a member of the United States Organizations for Bankruptcy Alternatives. USOBA represents and advocates for the "fair regulation of the industry and the protection of consumers. USOBA is the preeminent trade association for the debt settlement/negotiation industry. Visit to learn more about the criteria a member must meet.


The Bankruptcy Abuse Prevention and Consumer Protection Act is federal law which protects you as a consumer.

When an individual is bankrupt, he or she is insolvent and unable to meet debt obligations. A debtor may file for bankruptcy, which is called "voluntary bankruptcy," or a creditor may petition the court to declare the debtor bankrupt, which is called "involuntary bankruptcy." There are four types of relief available to individuals or corporations under the Bankruptcy Code:

  • Liquidation (chapter 7)
  • Reorganization (chapter 11)
  • Debt adjustment for a family farmer (chapter 12)
  • Debt adjustment for an individual with a regular income (chapter 13)


A. Bankruptcy protects the debtor from debt collection by creditors. As soon as a debtor files for bankruptcy, there is an automatic stay and most creditors must stop their collection efforts.

B. A debtor may be able to keep all or most of his or her property through federal and/or state exemptions; and certain liens and certain involuntary transfer (such as garnishments), may be avoided if timely action is taken.

C. The advantage of obtaining a fresh financial start.

D. Chapter 7 is best for debtors who have little property and mostly unsecured debts because all debt is liquidated.

E. Employers are not allowed to dismiss an employee based upon the fact that they, the employee, are filing bankruptcy.


A. Credit scores will be adversely affected for at least 7-10 years.

B. Valuable, Non-exempt possessions may be lost

C. Inability to obtain a mortgage for some time.

D. Not all debt will be discharged, such as certain taxes, governmental fines, criminal or fraudulent conduct, child and spousal support, drunk driving, and most student loans.

E. A debtor may receive a bankruptcy discharge of debts only once every eight years.

Always Talk to a Lawyer First

It is recommended you get advice from an attorney who specializes in assessing the best option for you - debt settlement, debt consolidation, fair collection practices and/or bankruptcy.

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