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Debt Settlement vs. Debt Consolidation

When considering options for debt relief, it is important to consider both debt settlement and debt consolidation. Both strategies have significant financial advantages for the debtor.

Debt settlement negotiates with the creditors until an agreement is reached in which the debt is reduced and a certain fixed amount remains to be paid off. The end result is a significantly smaller amount of debt, usually 50-70% of the monies owed. However, the debt negotiations can take a long time, in which the debtor’s credit is negatively impacted even more, this is why using Attorneys For Consumers who can accelerate the process is often better than doing it yourself. Once an agreement has been reached, the debtor must adhere strictly to the stipulations of the agreement and ensure that all payments are made on time, or the creditor may still be able to come after him for the full amount. Furthermore, the debtor’s credit rating will remain affected until all amounts have been paid in full and it may take the debtor a number of years to build his credit rating back up again. However, due to the lower amount of monies owed the debtor can obtain debt relief in a relatively short period of time.

Debt consolidation takes all current debts and rolls them into one large loan at a lower interest rate than is currently being charged. Debt consolidation usually requires a valuable like a home to secure the financing. The debtor obtains debt consolidation financing and uses it to pay off all the creditors. After that, the debtor pays one monthly fee to the bank that provided the financing. This option can save a fortune in future interest and offers lower monthly payments, but the principal debt remains the same. Because of this, it usually takes longer to pay off your debts with debt consolidation. However, the lower interest rates can be significant and sometimes tax deductible.

When comparing debt settlement vs. debt consolidation it is important to evaluate all features and how they pertain to your situation. Debt settlement does not require a valuable asset like a home and can result in a significant reduction in debt, but often has a negative effect on the debtor’s credit rating. However, the debtor pays off his debt faster and can start rebuilding his credit sooner. Debt consolidation has the advantage of resulting in often only one creditor at often lower interest rates, but requires a valuable to secure the financing and does not reduce the balance owed at all. Further, if the debtor is subsequently unable to make the payments to the financing bank, he could lose his home.

If you are in debt, own your own home and are considering debt consolidation, first see if you qualify for a loan modification before risking your house with debt consolidation.

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