Compare the costs of a credit card consolidation, settling for less, and bankruptcy.
Not sure what to do about bills I can no longer keep up with. Everywhere I read seems to point out either joining a credit counseling program for debt consolidation, or starting a debt settlement program. I am also told that I can do bankruptcy. I like how you have pointed out on your site that there are hard costs and fees to ask questions about debt settlement, but I am not seeing much about debt consolidation or bankruptcy.
What does debt settlement cost compared to credit counseling consolidation and bankruptcy?
There is quite a bit more to comparing these three mainstream debt relief options. The costs of debt consolidation through credit counseling services, debt settlement programs, and bankruptcy, are nearly always going to provide a stark contrast. But there are benefits and drawbacks to each debt solution that cannot be measured with dollars. You are way ahead of many people researching debt relief by focusing on the cost benefit of each first.
A debt relief company, and people working for it, are often selling you a specific type of debt help, and can often be found to over emphasize program benefits and gloss over drawbacks. I write about that on this and other sites often. That’s not on point with your question about costs, so….
Compare debt consolidation with settling and Chapter 7 Bankruptcy.
You can quickly determine the affordability of debt consolidation and debt settlement for a given set of cash flow limitations. Chapter 7 bankruptcy will win on the affordability scale as far as out of pocket dollar costs, but can fail in other ways because the court can force you to liquidate assets. Let’s compare the same amount of unaffordable credit card debts and the costs, including time to completion, for consolidating, negotiating, or discharging the bills in bankruptcy.
Assuming a person has $20,000.00 in unsecured credit card debt they can no longer afford to keep current with due to high interest rates, and a loss of income, here is how the costs shake out for each of the three debt relief solution.
How much a debt consolidation program costs:
Based on a monthly payment calculation of 2.0% of your enrolled credit card balances (and other conforming unsecured debt), you would pay $400.00 each month for 60 months for a total of $24,000.00.
How much a Debt Settlement Program costs:
Based on negotiating the debts down to less than half of what was originally owed, and assuming fair and affordable fees for the service, you may pay $10,000.00 over a recommended 24 month period.
How much a Chapter 7 Bankruptcy costs:
Based on a straight chapter 7 bankruptcy filing where there are little to no nonexempt assets to contend with, you could pay costs and fees between $1500.00 to $2000.00. Your filing and discharge of unmanageable debts is typically completed in three months.
Which option looks the most appealing and provides the best economic benefit from a strict dollars and sense perspective?
This very simple dollar/time/relief outline is not generally discussed by the people and companies offering you a debt consolidation program or debt settlement plan. Instead, you might hear how bankruptcy ruins your credit for 10 years (not true), or how settlement will get you sued and hurt your credit for 7 years (also not true if you are a suitable candidate).
There is more to compare than costs.
Do the math and focus your attention on that first. Don’t rely on others to inform you using carefully scripted words and phrases that hit your emotions, but do not scratch the surface of assisting you in becoming truly informed. Once the cost comparison is out of the way as your top line consideration, move on to evaluating whether bankruptcy will force you to sell off assets, where those proceeds could be used to pay down credit card balances, that then makes debt consolidation workable within your monthly budget, or perhaps how those funds can go toward payment a negotiated settlement for less.
Aside from a cost benefit analysis of each debt relief method, many people will focus on credit reporting and credit score affects. There is a good amount of misconceptions out there about how credit counseling, debt settlement and bankruptcy will impact credit scores and access to new credit products. Over exaggerating or downplaying the limited, or major impacts to your credit score, is a good example of how sales people, counselors, and experts, can attempt to focus your attention on the particular type of debt relief they endorse. Read more about credit report and credit score impacts with debt relief options.
I hope this information is helpful. If you cannot qualify with a counseling agency for their debt consolidation program, and there is something about your situation that has you looking at negotiating settlements to avoid bankruptcy, I would encourage you to start reviewing my debt negotiation guide.
Anyone with questions or concerns about how to compare debt consolidation, negotiating bills for less, and bankruptcy, is welcome to post in the comments below for feedback.