Last Updated: February 06, 2024
The average American carries around a balance of $6,375 in credit card debt alone. That is an increase of 3% from last year. In 2017, total credit card debt held by Americans reached $1 trillion. If you have a lot of credit card debt and are looking for a quick way out, you are not alone. You’ve probably seen several terms – debt consolidation, debt settlement, and bankruptcy. These can sound similar, and each one has its unique pros and cons. We’ll look at the first two in more depth and then compare the pros and cons of bankruptcy.
Debt consolidation takes all your debts and rolls them into one. You then take out a loan and pay off the debts. You then pay off that loan through monthly payments. To get a loan, you’ll probably have to have some sort of collateral. The goal is to get a reduced interest rate and lower monthly payments. Debt consolidation is best for people who are only making minimum payments.
Since most debt consolidation plans involve loans, you may have additional fees like origination fees or closing costs. Those fees can add quite a bit to your existing debt.
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There are several types of debt consolidation. These include a debt management plan (DMP), balance transfer on credit cards, personal loans, or home equity line of credit (HELOC).
A debt management program includes credit counseling and education programs. They can take a long time – up to 5 years – to complete. You will learn the roots of your financial problems and how to manage them.
Balance transfers on credit cards allow you to transfer your existing balances to a lower-interest card. This sounds great except that 0% balance cards are hard to get. If your credit score isn’t over 700, you probably won’t get one. In addition, balance transfers come with a transfer fee of 2-3% on the balance and an expiration date of 12 to 18 months on the lower rate. Interest rates can then increase to more than your initial card.
Personal loans can be hard to get if you have a high debt-to-income ratio. You may end up with an origination fee, a prepayment penalty, and may need to have collateral (your car, home, etc.).
HELOCs have low interest rates but your home is the collateral. If you don’t make the payments, you could lose your house. Since it is a loan, you may have to pay application fees and closing costs as well.
Debt consolidation can hurt your credit score and report. Taking out a loan requires a “hard pull” on your credit report. This will lower your credit score for a bit. It can lower your credit utilization ratio if you open a new credit card and transfer all your balances to it.
In debt settlement, you negotiate with your creditor to lower the amount you owe. If negotiating is not in your skill set, there are companies like Pacific Debt, Inc. that specialize in negotiating with creditors and have an excellent track record in debt negotiation services. The secret to debt settlement is that you have to stop paying your bills to make creditors willing to negotiate. This action can come with late fees and creditor phone calls.
Unfortunately, debt settlement does come with some credit score and credit report damage. Your late payment history may stay on your credit report for up to seven years. You should consider debt settlement for debts that are very delinquent or already in collections or if you are struggling to even pay the minimum. That way the damage is already done to your credit score.
The quick answer is that in debt consolidation, you take out a loan to pay off all other bills, and then pay off the loan. In debt settlement, you negotiate with creditors to lower what you owe. When comparing debt consolidation vs debt settlement, take into consideration the effects on your credit score, the fees charged in each case, how long the program will last, and how delinquent your debt.
Bankruptcy is a legal action to have your debt erased. Bankruptcy is a last resort. It can stay on your credit report for up to ten years. It is also legally complex and expensive. In debt consolidation vs bankruptcy vs debt settlement, always try debt consolidation or debt settlement first.
Debt consolidation, debt settlement, and bankruptcy all provide debt relief but have key differences. See this comparison of the pros, cons, and key factors of each option to understand which may be best for your unique situation.
Debt Consolidation | Debt Settlement | Bankruptcy | |
---|---|---|---|
Impact on Credit | Typically improves credit if payments are made on time | Can damage credit due to delinquencies | Negative mark for up to 10 years |
Cost | Interest paid on consolidation loan; may have origination fees | Fees range 15-25% of enrolled debt | Several thousand dollars in legal and court fees |
Debt Resolution | Debts not reduced, but consolidated into one payment | Debt reduced by negotiated settlement amount | Much or all debt eliminated |
Time to Complete | Per loan repayment terms, typically 2-5 years | Around 2-4 years to complete negotiations | Bankruptcy filing leads to immediate injunction; debt discharge process typically less than 6 months |
If hiring a company to negotiate settlements, make sure to vet them thoroughly first.
Your credit score will likely drop significantly due to missed payments and delinquency reporting while you are settling debts. Late payments stay on your report for up to 7 years.
No, you do not need good credit for debt settlement. It is often best for those with very poor credit. We can help as long as you have $7,500+ in debt.
We can settle credit cards, medical bills, personal loans, and other unsecured debts. Settling secured debt like auto loans or mortgages can risk losing collateral.
Yes - through years of experience we've refined negotiation tactics that often secure 50% or more savings for clients. We've settled over $200 million in debt at an average 50% savings.
Once you enroll accounts with us, we send letters informing creditors. Some may still contact until the negotiation finishes but calls usually decrease over time after starting the program.
The settled status remains for 7 years from the date of settlement. But this is still better than unpaid charge-offs, which hurt for the full 7 years from the first delinquency.
Yes, the IRS usually considers forgiven debt from the settlement as taxable income. We provide 1099-C tax forms reporting settled debt over $600. There are exceptions, so discuss with your tax professional.
Dealing with overwhelming debt leaves most feeling hopeless and frustrated. Yet solutions do exist - from consolidation to settlement to bankruptcy, relief is possible. There is always a light at the end of the tunnel.
When weighing which path is best, consider your unique financial circumstances and goals carefully before moving forward. Be wary of simplistic promises or high-pressure sales tactics; research firms thoroughly to verify their reputation and claims.
The debt experts at Pacific Debt are here to help with a free, no-obligation consultation. We'll review your debt, income, expenses, credit score, past efforts - everything to provide clear advice if consolidation, settlement, or another debt relief option is your most strategic choice. Our goal is to create an informed, empowered client, not a quick sale.
Unlike credit counseling agencies or debt consolidation companies, Pacific Debt’s main objective is to eliminate your debt. If you successfully follow our program, you may be debt-free in 2 to 4 years. To be eligible for the Pacific Debt settlement program, you must have more than $10,000 in unsecured debt
We rate very highly in Top Consumer Reviews, Top Ten Reviews, Consumers Advocate, Consumer Affairs, Trust Pilot, and US News and World Report. For more information, contact one of our debt specialists today. The initial consultation is free and our debt specialists will give you all your options.
Pacific Debt has helped thousands of people reduce their debt. Since 2002, we’ve settled over $200 million in debt for our clients. Contact us today to see how we can help.
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*Clients who make all their monthly program deposits pay approximately 50% of their enrolled balance before fees, or 65% to 85% including fees, over 24 to 48 months (some programs lengths can go higher). Not all clients are able to complete our program for various reasons, including their ability to save sufficient funds. Our estimates are based on prior results, which will vary depending on your specific circumstances. We do not guarantee that your debts will be resolved for a specific amount or percentage or within a specific period of time. We do not assume your debts, make monthly payments to creditors or provide tax, bankruptcy, accounting or legal advice or credit repair services. Pacific Debt is not a credit repair firm nor do we offer credit repair services. Our service is not available in all states and our fees may vary from state to state. Please contact a tax professional to discuss potential tax consequences of less than full balance debt resolution. Read and understand all program materials prior to enrollment. The use of debt settlement services will likely adversely affect your creditworthiness, may result in you being subject to collections or being sued by creditors or collectors and may increase the outstanding balances of your enrolled accounts due to the accrual of fees and interest. However, negotiated settlements we obtain on your behalf resolve the entire account, including all accrued fees and interest. C.P.D. Reg. No. T.S. 12-03825.