Q&A: Debt relief offers aren’t all equal. Is bankruptcy a good option?

Dear Liz: There seems to be an abundance of companies offering debt reduction, debt settlement and debt consolidation programs now. Are there any differences in these programs? Some of these companies offer a program whereby high credit card balances and loans are combined and substantially reduced, and the debtor would make a single payment to said company. What are the pros and cons of this type of program? What would be the effect on the credit history of the debtor?

Answer: If a company is promising to help reduce the total amount you owe, that’s known as debt settlement. Typically, you stop paying your debts and instead make payments to the debt settlement company, which tries to negotiate a deal with your creditors.

Debt settlement can have a substantial negative impact on your credit scores, and you may be sued by creditors that are unwilling to settle. The process can take several years and you may have to pay taxes on any amount of debt that is forgiven, because that’s considered taxable income to you. Once you add in the company’s fees, the amount you save through debt settlement may be less than you expect.

If you’re considering debt settlement, first consult with a bankruptcy attorney (the National Assn. of Consumer Bankruptcy Attorneys offers referrals), because bankruptcy is often a faster, cheaper and safer way to erase overwhelming debt. The most common type of bankruptcy, Chapter 7 liquidation, typically takes three or four months, stops collection actions, legally erases many types of debt and allows you to begin rebuilding your credit immediately.

If a company is promising to lend you money to pay off your loans and credit cards in full, that’s known as debt consolidation. Debt consolidation can make sense if you can get a lower interest rate than what you’re currently paying, the payments are affordable and the loan allows you to get out of debt faster. However, you’ll need to beware of debt consolidation companies that charge large upfront fees or that charge high interest rates. If you have bad credit, you probably would be better off consulting with a nonprofit credit counseling agency than paying high rates for a debt consolidation loan.

Tuesday’s need-to-know money news

Today’s top story: Changed travel plans on the menu this Thanksgiving. Also in the news: Online shopping already hit holiday-lvel peaks this year, when you can apply for a credit card after bankruptcy, and how the pandemic has made the racial retirement gap worse.

Changed Travel Plans on the Menu This Thanksgiving
Three in 5 U.S. adults who had Thanksgiving travel plans say these plans have been affected by the pandemic, according to a NerdWallet survey.

Online Shopping Already Hit Holiday-Level Peaks This Year
Shopping looks a little different this year.

When Can I Apply For A Credit Card After Bankruptcy?
Your options are limited.

The pandemic has made the racial retirement gap worse. Here’s how individuals can close it.Closing the racial retirement gap for people of color, even in this pandemic, could begin with broadening access and financial education.

Monday’s need-to-know money news

Today’s top story: Travel insurance options for digital nomads. Also in the news: What to do if you’ve been denied student loan refinancing, a new set of shopping tips in the pandemic, and what really happens when you file bankruptcy.

Travel Insurance Options for Digital Nomads
Digital nomads might travel for extended periods of time, so their needs are different than the average traveler.

Denied for Student Loan Refinancing? What to Do Next

A New Set of Shopping Tips in the Pandemic
Keeping yourself safe.

What Really Happens When You File for Bankruptcy
A look at each type of bankruptcy.

Thursday’s need-to-know money news

Today’s top story: Why playing the market right now is an especially bad idea. Also in the news: Is student loan discharge in bankruptcy within reach, the difference between being preapproved and prequalified for a credit card, and how your credit score is determined.

Playing the Market Is a Bad Idea, Especially Now
Brokerages have reported a surge in day trading, but the vast majority would be better off in low-cost funds.

Is Student Loan Discharge in Bankruptcy Now Within Reach?
Recent court rulings and lawmakers’ support to expand relief could help borrowers meet the stringent standards.

What’s the difference between being preapproved and prequalified for a credit card?
An unsolicited approval from a credit card issuer can be a red flag—they could be trying to sell you on a card you don’t need or want

How Your Credit Score Is Determined
Unraveling the mystery.

Monday’s need-to-know money news

Today’s top story: Mortgage Outlook: A pre-election pause for October rates? Also in the news: A new episode of the SmartMoney podcast on the unequal employment recover and the case for used cars, many avoid bankruptcy out of fear, and how to opt out of pre-screened credit offers.

Mortgage Outlook: A Pre-Election Pause for October Rates?
Rates are standing still.

Smart Money Podcast: Unequal Employment Recovery, and the Case for Used Cars
Used cars are a no-brainer if you’re trying to save money.

Many avoid bankruptcy out of fear
People often wait too long to file, draining retirement accounts or other assets that would be protected

How to Opt Out of Pre-Screened Credit Offers
Reducing your junk mail.

Friday’s need-to-know money news

Today’s top story: Fear of bankruptcy holds too many people back. Also in the news: Saving for a down payment is only the start for homeowners, pressing pause on private student loans, and it’s time to revise your pandemic budget.

Fear of Bankruptcy Holds Too Many People Back
Many people could benefit from bankruptcy relief but don’t file because of fear, myths or misplaced optimism.

For Homeowners, Saving a Down Payment Is Only the Start
The down payment is just one cost to save for.

Should You Press Pause on Private Student Loans?
Forbearance isn’t the only way to get a more manageable private student loan payment.

It’s Time to Revise Your Pandemic Budget
Budgeting is more important than ever.

Fear of bankruptcy holds too many people back

The mystery isn’t why so many people file for bankruptcy each year. It’s why more people don’t.

Each year, only a fraction of the Americans who could benefit financially from bankruptcy actually seek relief. Economists say some don’t file because collectors aren’t aggressively pursuing them, while others may strategically delay filing because bankruptcy could benefit them more down the road.

Many bankruptcy attorneys have a much simpler explanation: Fear, a lack of information and misplaced optimism keep people from getting a fresh start. In my latest for the Associated press, why bankruptcy may be the best option for those struggling with debt.

Thursday’s need-to-know money news

Today’s top story: Start thinking bankruptcy now to maximize your options later. Also in the news: Why this is the perfect time to teach teens about credit, how to protect your stimulus relief check from debt collectors, and how to return a deceased relative’s stimulus check.

Start Thinking Bankruptcy Now, to Maximize Your Options Later
Timing is everything during the pandemic.

This is the perfect time to teach teens about credit
5 ways to prepare Gen Z for the real world of debt and finances.

How to protect your stimulus relief check from debt collectors
Turn that check into cash quickly.

How to Return a Deceased Relative’s Stimulus Check
Unfortunately, you can’t keep it.

Start thinking bankruptcy now, not later

If you’ve lost your job or struggle to pay your debt, you may need to file for bankruptcy. If that’s the case, you should ignore some common financial advice and start thinking defensively.

The coronavirus pandemic that upended the economy is also expected to send unprecedented numbers of people and businesses to bankruptcy court. Millions are out of work, and economic disruptions could continue until a vaccine is widely available, something that may be more than a year away.

“I am gearing up for having a tsunami of new cases,” says Jenny Doling, a bankruptcy attorney in Palm Desert, California, who serves on the American Bankruptcy Institute’s Chapter 13 Advisory Committee. “I think there will be a whole lot more people filing than what anyone’s ever seen before.”

In my latest for the Associated Press, what you need to know now if bankruptcy is in your future.

Unlock the debtor’s prison of student loans

Earlier this year, a judge denounced the myth that student loans can’t be erased in bankruptcy court as she excused a Navy veteran from having to pay $221,000 in education debt. Bankruptcy judge Cecelia G. Morris’ decision garnered plenty of headlines, along with speculation that the ruling might make such discharges easier.

The battle isn’t over, though. A few days later, Morris’ ruling was appealed by the Education Credit Management Corporation, a nonprofit company that guarantees and services federal student loans for the U.S. Department of Education.

In my latest for the Associated Press, what the American Bankruptcy Institute’s Commission on Consumer Bankruptcy recommends to begin freeing borrowers from their loans.