As a senior, if you have a large amount of debt, you might be curious about debt settlement vs. debt consolidation. These are two ways to handle your debt, but they are very different. It’s important to consider your debt and which option will work best for you.
Before going through any debt relief program, be sure to know what you’re getting into. First, let’s look at debt settlement and consolidation, along with the best ways to handle debt as a senior.
What is Debt Settlement?
Debt settlement comes in a few different options. The basic idea is you or someone for you will negotiate with your creditors to settle your debt for a lower amount. For example, the creditor might lower the interest rate, waive late charges, or even settle for a lower balance, depending on the debt.
Often, a debt settlement service will do the hard work for you. For example, if you try to settle debts yourself, you might have to come up with a large sum to pay off the debt within 30 days of reaching an agreement. However, with a debt settlement service, they might have you pay monthly and settle debts one by one over a few years.
What is Debt Consolidation?
Debt consolidation usually comes in the form of a loan. This debt relief option will combine all your current debts into one loan so you can pay them off with one monthly payment.
Often, you will get a reduced interest rate and a lower monthly payment. This option is usually used for consumers with multiple unsecured debts, such as credit cards and personal loans.
Debt Settlement Vs. Debt Consolidation: The Main Differences
While debt settlement and debt consolidation might be looked at as the same thing by some, they are certainly not the same. Both options can help you deal with debt, but they do it differently.
The debt settlement industry is a for-profit industry. Companies claim they can settle debts for a lower amount than what is owed. Sometimes, this is labeled as debt relief because the company you work with will take over the management of all your debt accounts. Over time, they will collect monthly payments and pay off the debts with lump-sum settlements.
Going through the debt settlement process may lead to some savings, but it can also hurt your credit. It can also result in more considerable interest charges or late fees.
Debt consolidation, on the other hand, is an actual product that is used to consolidate all your debts into one. It might be a loan or even a credit card. You can roll over all your debts into one account to make it easier to manage the payments.
Each debt consolidation product will be different and may have a different rate or fee. It might also have other requirements to qualify. This is often the best choice to reduce your interest rates and make your monthly payment lower and easier to manage.
Choosing the Right Debt Relief Option for Seniors
As a senior citizen, you have a variety of debt relief options at your disposal. Some are better than others, and some only work for specific situations. The following options are available to help you get control of your debts.
Bankruptcy
A standard option used for those with a large amount of debt they cannot pay is bankruptcy. It comes in two different forms. One may fit your situation better than the other.
Chapter 7 Bankruptcy
With a Chapter 7 bankruptcy, you can eliminate most unsecured debts. If you have secured debts, such as a car loan, it will have to be turned into an unsecured debt to be included in this type of bankruptcy.
This is usually not the best choice for seniors. Often senior citizens will have significant equity in their homes, which can make it hard to use a chapter 7 bankruptcy for debt relief. The money to pay creditors with this type of bankruptcy will come from selling the collateral.
Chapter 13 Bankruptcy
A chapter 13 bankruptcy will work best if you have too much nonexempt equity in property or you have secured debts you have fallen behind on but want to keep the collateral. A chapter 7 bankruptcy should always be considered first.
With a chapter 13 bankruptcy, the money used to pay unsecured creditors comes from future income. You can use this type of bankruptcy to pay off debts not discharged in a chapter 7 bankruptcy.
Credit Card Debt Counseling
While bankruptcy might offer a faster option for debt relief, meeting with a nonprofit credit counseling agency is a good idea. This type of agency can help you understand the types of debt you’re dealing with and how they might be able to help you. It’s a good option if you have a lower amount of debt and most of the debt is credit cards. It can also help if you have a sufficient amount of money in your retirement account or if a chapter 7 bankruptcy won’t work for you.
Debt Consolidation
If you qualify for debt consolidation, it’s a good option to help you pay less per month and better manage all your debts with just one monthly payment. This option will usually lower your interest rate and help give you more monthly cash flow.
Debt Settlement
Seniors not worried about taking a hit on their credit score can use debt settlement to make it easier to manage debts. Make sure you understand the possible tax consequences. This option works great for those looking to settle debts but looking for help with negotiating.
There are many different ways to deal with debt as a senior citizen. If you’re considering debt settlement or debt consolidation, make sure you understand both options before you make your final decision. One option may work better for your specific types of debt and your specific situation.
