When you find yourself deep in debt it’s easy to get lured in by all sorts of strategies and debt relief options that seem to make sense on the surface. While there are certainly a number of different options that make sense depending on your individual situation, not all of them are suitable for everyone. Two of the most common debt relief options, debt settlement and debt consolidation, are designed to designed to provide relief to borrowers that find themselves unable to address their accumulated debt. Although both of these options are a great way to avoid a bankruptcy claim, there are certain things you should know about them prior to making a firm commitment. Fortunately, we have the information you need in order to make the best possible decision.
Choosing the wrong method to address your financial concerns can be almost as damaging as not addressing them at all, which is why it’s important understand the difference between a debt settlement vs. debt consolidation. Though both of these strategies are designed to get you back on track in terms of your personal finances, they differ from each other in a number of ways.
Debt Settlement Explained
Under the debt settlement process, a borrower negotiates with their creditors for a reduction in the total amount they owe. This negotiation can be done either directly or through a debt settlement attorney and generally involves making a single large payment in exchange for a percentage reduction on the remaining balance. The debt settlement process is reserved for borrowers that have at least $7,500 of unpaid debt and for those that can afford the attorney fees. Although borrowers are permitted to negotiate directly with their creditors without the services of an attorney, their likelihood of success is greatly reduced.
The primary benefit of debt settlement is that a borrower is granted almost immediate relief from their monthly payments. This allows the borrower to quickly regain their financial footing while possibly addressing other bills in the process. This also allows an individual to begin rebuilding their credit right away instead of worrying about late fees and rising interest rates. The downside of the settlement process is that it can be particularly damaging to your credit score in the short term. While a settlement can actually help to improve your score over the long term (as it allows you to become debt free), you will be forced to accept strict lending terms for at least 2 years after the settlement has been processed.
It’s important to note that the debt settlement process can be risky depending on the company or individual you hire to manage your case. There are several companies out there that might not have your best interests at heart, which is why it’s important to work with a company that has a proven track record of success and service. If you have a choice, it’s also best to work with a company that only requires payment based on a successful outcome. The amount you pay should be directly related to the amount of debt that the company is able to negotiate from your creditors.
Debt Consolidation Explained
The process of debt consolidation involves taking out a single large loan to pay off several small loans, and almost always involves using some sort of large asset (a house) as collateral. Because the consolidated loan is secured by a house, the bank is likely to lend at more favorable terms, which can allow the borrower to get back on track in terms of their overall financial picture. Failure to make payment on a consolidated loan typically drives the sale (or forced foreclosure) of the collateralized asset.
A consolidated loan sometimes makes sense to erase credit card debt or other debt that carries with it a high interest rate. The idea is that the consolidated loan will carry a much lower interest rate because it’s secured by real property. Consolidation loans are typically set up through loan consolidation companies, which means that the borrower must exercise caution in order to select a reputable company.
Making The Right Decision
When looking at debt settlement vs. debt consolidation, there is no right answer. You must weight the pros and cons of each and come to a logical decision, preferably with help from a financial professional or advisor. Although a debt settlement can produce results quickly, it can be potentially damaging to your credit score. On the other hand, debt consolidation has less of an effect on your credit score, but takes longer to initiate. Plus, finding the right debt consolidation company to work with can be time-consuming and stressful.
For more information on managing your debts and for a complete guide on how to claim bankruptcy, please take a moment to browse through our site at Claiming Bankruptcy. We also offer information on bankruptcy school loans for those looking to eliminate their student loan debt through the personal bankruptcy process.