FREE CONSULTATION • CALL US 24 / 7 212-994-7777

Debt Consolidation Vs. Settlement

What Is Debt Consolidation?

Debt consolidation refers to the process of folding multiple debts into one single payment. This is generally done with high interest debt, such as credit card debt, in an attempt to get a lower interest rate and make the repayment process easier. Debt consolidation can reduce a person's total debt, as well as reorganize it so that it can be paid off much quicker. Simply put, debt consolidation combines your bills into one monthly payment so that the amount paid per month is decreased, and interest rates are reduced or eliminated. In order to consolidate your debts, you generally must work with a debt consolidation company that specializes in assisting people manage their debt.

Debt consolidation is ideal for those who have a manageable amount of debt, and would like to organize multiple bills that have differing interest rates, due dates, and payments.

How Does Debt Consolidation Work? What Kinds of Debts Can Be Consolidated?

Generally speaking, there are two basic types of debt consolidation:

  • Debt Consolidation Loan: A debt consolidation loan combines all of your debts into one single loan that you make monthly payments on. This loan is generally at a fixed rate, and the money from the loan is used to pay off the debt. You would then pay back the loan in installments, over a set amount of time. Additionally, this process reduces your interest rates as well as the amount that you pay every month. A debt consolidation loan will stop the creditors from calling and can save you from bankruptcy; however, this type of debt consolidation requires you to own a home against which you can take or refinance a loan. Although you may qualify for a debt consolidation loan if you have bad or fair credit, borrowers who have higher credit scores will most likely qualify for the lowest rates available; and
  • Debt Management Plan: A debt management plan is an agreement that your debt consolidation company negotiates with your creditors. This plan describes how and when you are going to pay off your creditors, and by adhering to the plan, your monthly payments are reduced so that you can completely pay off your debt. This method of debt consolidation also ceases creditor calls, and does not require you to own a house.

One other method of debt consolidation would be to obtain a 0% interest, balance-transfer credit card. You would transfer all of your debts onto this card, and then pay the balance in full during the promotional period. However, you would most likely need good or excellent credit in order to qualify.

Generally speaking, unsecured debts can be consolidated. Unsecured debt refers to any type of debt that is not backed by some sort of asset, such as a home or a car. Unsecured debt allows the lender to sue the borrower if they do not pay, in order to obtain the money that is owed to them. Because of the risk that they will not get paid, creditors frequently impose higher interest rates on unsecured debt.

Alternatively, secured debt is debt that is backed by collateral. Collateral is any asset or property, such as a home, that the lender can seize if the person is unable to pay back the loan or the debt. The lender would seize the collateral in order to make up for the unpaid debt. The most common example of secured debt is a mortgage home loan, which is backed by the home itself.

Some of the most common examples of unsecured debts include:

  • Credit card debts;
  • Medical Bills;
  • Utilities;
  • Student Loans;
  • Taxes; and
  • Debt associated with various types of court judgments.

To put it simply, any type of personal loan that does not require the borrower to put up any of their assets as collateral would likely be considered unsecured.

Secured debts, such as mortgages, generally cannot be consolidated. The defining characteristic of secured debt is that the borrower must put up an asset to serve as collateral. If the borrower defaults on their loan, the lender can repossess this asset. Other examples of secured debts include car, motorcycle, boat, and RV loans, as well as home equity loans.

What Are the Pros and Cons of Debt Consolidation?

The pros and cons of debt consolidation should be taken into consideration before pursuing any sort of debt consolidation measures. Debt consolidation would be useful if:

  • Your monthly debt payments do not exceed 50% of your monthly gross income, including your rent or mortgage;
  • Your credit is sufficient to qualify for a 0% credit card, or a low interest debt consolidation loan;
  • Your cash flow can adequately and consistently cover payments toward your debt; and
  • You could pay off your debt consolidation loan within five years, should you choose the loan over other debt consolidation measures.

However, debt consolidation may not be suitable for you if you are overwhelmed by debt with no real ability to pay it off, even with considerably reduced payments. Additionally, if your debt is so small that you could pay it off within six months to a year at your current pace, it is likely that you would save a negligible amount by consolidating your debt. It is unlikely that doing so would benefit you much in the long run.

Finally, if your debts amount to more than half of your income, you should seek debt relief as opposed to debt consolidation.

What Are Some Common Disputes Involved with Debt Consolidation?

Many of the common disputes associated with debt consolidation reflect those associated with debt settlement. Most debt cancellation disputes are those involving breach of contract. An example of this would be when the borrower violates terms of a mortgage contract and fails to keep up with their mortgage payments. Such a violation may then fall under breach of contract laws.

Another common legal issue associated with debt settlements is that of third party rights. Debt settlement may be accomplished through the intervention of a third party paying off the borrower's debts, which could require another contract that details the terms of intervention. If no contract is made, that could actually be a violation of the original lending agreement.

Debt settlement disputes generally result in a damages award intended to reimburse the lender for losses. However, the borrower is frequently insolvent, or unable to pay due to lack of funds; hence, why the debt arises in the first place. In such cases, the court may issue a lien which allows the borrower to obtain title to the borrower's collateral, in an amount that is worth the value of the debt. An example of this would be when the bank forecloses on a home and takes possession of it, if the homeowner fails on their mortgage payments.

Do I Need an Attorney for My Debt Consolidation Problem?

If you are considering debt consolidation or have questions regarding the matter, you should consult with an experienced local debt consolidation lawyer or a financial lawyer. Finance laws may vary from state to state, and an area attorney will be best suited to helping you understand your rights and obligations according to your state's specific laws.

Additionally, a debt consolidation attorney can help you determine if debt consolidation is right for you. Finally, an attorney will also be able to represent you in court, as needed, should any legal disputes arise.