Struggling To Repay Your Creditors? Here’s How To Determine Which Debt Consolidation Option Is Right For You

If you're struggling to repay multiple creditors on-time, debt consolidation can help you get your finances back on the right track. You'll have one monthly payment that's lower than paying all of your creditors individually, which can help you avoid being sued or sent to collections by your creditors.

There are a few different ways you can successfully consolidate your debts, and they all have advantages and disadvantages. To find out which one would suit your financial situation best, read on to learn more about your options and the differences between them.

Personal Loan for Debt Consolidation

Some lenders offer loans that are meant specifically for debt consolidation. You use the funds from the loan to pay off your creditors in full, and then the loan company automatically debits your bank account every month in order to pay off the personal loan that you were issued.

These loans typically have low interest rates, so they're a good option for people who have lots of high-interest debt such as credit card debt. Additionally, loan terms can sometimes be up to six years for this type of loan, which allows you to spread your payments out over a longer period of time.

One downside of using a personal loan for debt consolidation is that you'll need good credit and a stable work history in order to qualify. The lender will want to be certain that you'll be able to make your monthly payments over the entire term of the loan. If you're already late on several bills and your credit score is dropping quickly, then this option may be unavailable to you.

Debt Consolidation Agency

A debt consolidation agency attempts to settle your debts for less than the amount that you currently owe. When you use an agency, you'll make monthly payments to them that are put into a savings account. Once there's enough money in the account, the agency will contact your creditors and ask to pay a lump-sum amount in order to fully settle your debts.

Creditors are sometimes willing to take a one-time payment that's lower than the amount you owe. For unsecured debt, they wouldn't receive any money at all if you discharged the debt through a bankruptcy. By taking the settlement payment, they're certain to receive at least some of the money that you owe.

The downside of using an agency to consolidate your debts is that there's no guarantee that your creditors will agree to a settlement. It's usually difficult to negotiate a settlement agreement for secured debt such as an auto loan, since the creditor can repossess your car and sell it to recoup some money if you default. Using an agency can be risky if you're trying to consolidate a large amount of secured debt, since your creditors will be less willing to negotiate a settlement.

Chapter 13 Bankruptcy

During a Chapter 13 bankruptcy, you'll work with a bankruptcy attorney to come to a repayment agreement with all of your creditors. You'll need to repay a portion of your debts during a three-to-five year period, and then the remainder will be discharged. A bankruptcy judge will need to consent to the repayment agreement that you and your attorney have drafted with your creditors.

Since the repayment agreement is court-ordered, you have more legal protection under a Chapter 13 bankruptcy compared to using a debt consolidation agency. You and your creditors are all bound to the agreement, so they can't change its terms. As long as you continue making your monthly payments, you have a guarantee that your creditors will settle for the amount you've managed to negotiate during the bankruptcy process.

Using a Chapter 13 bankruptcy to consolidate your debts does have a negative effect on your credit. This type of bankruptcy stays on your credit report for seven years after you file it. However, it's often better than simply letting your creditors send you to sue you and win judgments against you, since those stay on your credit report for seven years as well.

Which choice is the best for you? If you have good credit and can make the repayments for a personal loan, then that's usually the overall best option. You'll have one monthly payment, and you won't negatively affect your credit score.

Unfortunately, many people seeking debt relief will have a credit rating that's too low to qualify. In this case, a Chapter 13 bankruptcy is often the best option. You'll have a legal guarantee that your creditors will settle your debts for less than you owe, which gives you more protection than you'd receive from a debt consolidation agency. If you think that bankruptcy is your best option, you'll need to start the process by speaking to a bankruptcy attorney in your area.