What is Debt Settlement?

Debt settlement is a third party company service that attempts to decrease the debt you owe by arranging for discounted settlements with creditors and debt collectors. Debt settlement firms can reduce the debt you owe, but this is usually done at the expense of harming your credit. These programs and their services charge fees that could increase your debt. 

Other names for debt settlement firms are debt adjusting and debt relief companies. They operate by talking with your creditors for you to negotiate a lower payment and interest rate. Sometimes they can reduce the total debt you owe or settle your debt for a lump sum amount. 

For these services, they charge a percentage of the total of savings they arrange for you in the debt restructuring. 

Firms which attempt to settle all debts for single lump sum payments will often require you to make routine deposits into an account you control while they negotiate on your behalf. A third party administers this account and the money you save to pay out lump sum settlement payments on your debt. 

Your debt consolidation company may suggest that you stop paying your bills until they reach the settlement arrangement. This can negatively impact your credit as well.

After the debt settlement firm has reached agreement with your creditors and reduced minimally one of your debts, you will have to consent to their terms to make at least one payment to the debt collector or creditor for this settled amount. At this point, the debt settlement firm is able to assess you fees for the services they performed on your behalf. 

What is Debt Consolidation?

Debt consolidation is the rolling over of high interest debt (like credit card bills) to a lower interest payment loan with a single payment. Pursuing debt consolidation can help you to lower the total amount of debt you have to repay and to better organize it to pay it down quicker. 

Two main types of debt consolidation help you to reorganize your debt. You could apply for a debt consolidation loan at a fixed interest rate. When you get this money, you then utilize it to pay your other debts off. You pay the debt consolidation loan for a set term in monthly instalments. 

The other primary method is with a zero percent or low interest balance transfer offer from a credit card. These offers permit you to transfer your other credit card bills onto the card and then pay off your balance (preferably within the promotional period).

If you own a house, you might also consider taking a home equity loan for debt consolidation purposes. The risk of this is that it puts your home in danger if you are unable to repay the loan. Your best option with debt consolidation comes down to your credit history and score, alongside your personal debt to income ratio. 

In order to be successful with debt consolidation, you need several things. Your aggregate debt (not counting mortgage debt) should not be higher than 40 percent of your gross income. You also need sufficiently good credit to be approved for a debt consolidation loan at a low interest rate or for a zero percent credit card balance transfer offer. It is essential that you have enough cash flow to continuously service your debt. 

Finally, you should make a plan to not incur a large amount of debt for the future.

What is Credit Repair?

Credit repair refers to fixing bad credit that could have declined for a number of differing reasons. This could be as easy as filing disputes for mistaken information with the main credit bureaus Experian, Equifax, and TransUnion.

It could be more involved if there has been identity theft and resulting damage to your credit report. In this case, more significant work is required to clear up credit A third type of credit repair involves addressing key financial issues and lenders’ concerns. 

It requires both effort and time to correct inaccurate information on credit reports. Third parties are not able to remove information held by the credit reporting bureaus. Instead this information (if it is inaccurate or falsely represented) may be disputed. This can be done by you personally or a credit repair company on your behalf. 

You or a credit repair company can file disputes when you find missing, inaccurate, or incomplete information on your credit reports. Catching this information and getting it corrected is critical in repairing your credit. Other ways that you can repair your credit focus on addressing your own credit activity and credit utilization. 

Just getting your credit card balances down to 30 percent or less of your total available credit will add significant points to your credit score. The credit utilization is the second most important factor of your credit score (at a 30 percent component). 

You can also repair your credit by making timely payments, which improves the most important component (that makes up 35 percent of your score).

Will Bankruptcy Clear all of My Debts?

The reason you may seek to file bankruptcy is to clear away your debts that you can not pay. Whether or not this will happen depends on the type of bankruptcy for which you are approved.

A discharge does release you from all personal liability of the debt. It also stops the creditor from continuing to pursue collection activity against you. Under such a discharge you are not required legally to repay these debts. 

Some debts can not be discharged completely. Liens that are not addressed during the bankruptcy case stay in force. Secured creditors are able to enforce these liens so that they can reclaim the secured property. 

A car payment is a good example. If you do not commit to a reaffirmation agreement on your car payment, the debt discharge would erase your obligation to pay back the loan. You would not be able to keep the car in such a scenario as the lender would have lien rights to repossess it. 

In the vast majority of cases, if you file a Chapter 7 bankruptcy and it is approved by the judge, then you will obtain a debt discharge at the conclusion of the case. 

The Chapter 7 process generally gives this discharge 60 days following the Meeting of Creditors (according to 341(a) statute requirements). This usually means that you would get your discharge around four months after you file your original petition for a Chapter 7 bankruptcy.  

It is important to know that Chapter 13 bankruptcy will not clear all of your debt. Instead it would make repayment arrangements that stretch from three to five years long. 

How Much Will Bankruptcy Hurt My Credit Report?

Chapter 7 bankruptcy will impact your credit report for a full seven years. Its effects vary based on how high your credit score is when you file.

FICO released case specific information back in 2010 on how bankruptcy will impact your personal credit score. In two scenarios, they revealed that a person with a 780 credit score could lose as much as 240 points while another with a 680 credit score could lose up to 150 points. 

The person with the higher score suffers a greater point loss. Both cases have your credit score settling at approximately the same level of 540 and 530. Should credit issues have already dragged your score down into the 500’s, then your score has already been negatively impacted to a large degree and you have less to lose. 

These are only examples. Your score could suffer less or even a little more depending on your personal credit and debt circumstances when you file for bankruptcy. 

FICO does not distinguish between Chapter 13 and Chapter 7 bankruptcies which cover personal debt discharge. 

It is worth noting that Chapter 7 ends fastest in only a matter of months following filing if you qualify. Chapter 13 bankruptcies take years to exit from as they involve from three to five years plans of repayment.