What is the difference between debt settlement and debt consolidation

Debt settlement and debt consolidation are two ways for those who are struggling with their debt to feel some sort of financial relief. Debt settlement has the ability to reduce the amount of debt you owe, and debt consolidation reduces the number of creditors in which you have debt with. Both have a similar goal in the end, but are very different strategies to use. If you’re looking to reduce your debt and get your head above water, it’s important to decide with option is best for you by being fully aware of what each strategy entails.

If you choose debt settlement, a credit counselor or debt settlement company will negotiate with your creditors to find a way out of your debt by offering to pay one lump sum which is far less than the amount you owe currently. Since the creditor has most likely not been getting any sort of payment from you and they don’t want to call it a complete loss, they often accept your offer and your debt will be considered paid off. It sounds simple, but remember, you have to prove financial hardship to be eligible, and your credit score will be negatively impacted. You will also be responsible for fees and taxes as a result of debt settlement.

Debt consolidation requires that you take out a new loan to pay off the others you currently have. The new loan will have a lower interest rate than your current debt and your month to month plan will be much easier to maintain.

Differences

Debt settlement means that you owe the same creditors, but you pay them a lower amount than what you owe. With debt consolidation, you will no longer owe your current creditors, but the amount you pay will be the same.

Debt settlement means that you have to negotiate with the creditor you are currently working with, but debt consolidation allows you to work with new creditors which can benefit your terms.

If you settle your debt, it will be gone after you make your lump sum payment. If you consolidate, your debt could take longer to pay off than originally outlined.

Similarities

They both offer ways to save you money in the long run, and if you have proved financial hardship, this can be a great benefit to you. Neither option will completely get rid of your debt without you having to make some sort of payment first.

Since both options can be complex, it is recommended you hire an expert to help you through your case. 

Debt settlement sounds like an appealing option to anyone who is feeling bogged down by payments and sees commercials romanticizing the idea of getting out of debt as soon as today. Before you dive right in and decide to pursue debt settlement, it’s important to understand the consequences of this decision, as well as the truth and myths you might have heard.

Myth: anyone can have their credit card balance cut in half

Before debt settlement is given as an option to borrowers, creditors will verify your income, assets, and current debt to be sure that you truly cannot make your payments and need your debts settled. If lenders believe that you can, indeed, make payments, they might offer you a debt management plan instead.

Myth: the only way to settle my debt is to hire someone to handle it

While it is not required to have an expert help you settle your debts, and you can communicate with creditors directly, it also doesn’t hurt to have someone in your corner who has expertise in this field.

Myth: I have to pay up front to have my debt settled

This is no longer the case, as debt settlement companies were recently banned from collecting any sort of fees in advance of their services. Any money that is set aside for fees and taxes by the consumer are controlled by the consumer only, and not the creditor. The consumer never loses control over their money.

Myth: debt settlement won’t affect my credit score

Unfortunately, this is not true. In fact, debt settlement has a very significant and negative impact on your credit score. This is a big part of the reason why debt settlement is not recommended to borrowers, especially if there is another viable option such as debt management. Debt settlement can hurt your credit just as much as filing for bankruptcy would.

Myth: going through a debt settlement company is low cost

This isn’t true as debt settlement companies charge you a percentage of the savings that they negotiate. This is on top of other fees and taxes you end up paying after debt settlement, so these numbers can add up. And, depending on the amount of debt, the percentage they collect can be a higher number than you are comfortable with.

Myth: I have to settle or my debt will stick with me forever

Collecting debt has an expiration date. The statute of limitation on collecting debt varies from each state, but if the debt hasn’t been paid for a number of years, it’s tough to be forced to in a court. In the same vein, any negative information on your credit report that details your failure to pay will go away after seven years.

What is debt settlement?

By now you have probably seen or heard commercials that are boasting a new way to get out of your debt. Debt settlement seems like an attractive choice when you feel as though you are drowning in debt. But what exactly is debt settlement? It’s important to be educated when exploring options that will have a huge impact on your financial present and future.

Debt settlement is a process of paying off your debt to the creditor after negotiating a payment that is manageable for you. Credit card debt and medical bill debt are two of the forms of debt that are eligible for debt settlement. You can hire a debt settlement company to help you negotiate and make your case, or you can even handle it on your own. It would be wise to talk with an expert before you dive into debt settlement, because debt settlement can have negative impacts on your financial standing, and more importantly your credit score. You also want to make sure you would qualify for debt settlement, as you need to prove you have intense financial hardships before you can even consider it. You will be asked to show proof of income, assets, and all of your debt owed to creditors can evaluate if you have the ability to make payments. In some cases, they will offer you a debt management plan to help you pay in a way that takes less of a toll on your monthly finances and income.

If you do decide to pursue debt settlement, then you should be educated on the basics. 

Once you decide to pursue debt settlement, then you would contact your debt settlement company, which is the most common practice as opposed to pursuing the settlement on your own, and you will enroll into the debt settlement program. The company will show your creditors that you have a financial hardship and offer a lump sum payment that will be attractive to creditors. Creditors don’t want to lose money, and since chances are you are already not making payments, they will be likely to accept a payment offer. 

It sounds fairly simple, but don’t forget the negative impacts on your credit and finances, and how long the affect will be visible. Especially if you see yourself buying a home or car in the future, you will have a very hard time doing so with your credit score being so severely impacted.