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.