Debt settlement vs. debt consolidation.

If you are struggling with paying your credit card bills, two options to consider are debt settlement vs. debt consolidation. We have compared the two options, and you should understand the pros and cons of debt consolidation vs debt settlement before you decide which is best for you.

Here is a comparison of debt settlement vs debt consolidation.

Debt settlement: If you are not in a position to make even reduced monthly payments on your credit card debt then a settlement may benefit you. Settlement will reduce or eliminate the principal on your outstanding debt obligations. It typically can reduce the amount you own by up to 60%. This process of debt settlement works wherein a debt relief organization can get your creditors and lenders to reduce your debt by 40-60% of the amount you owe. Then, once you repay 40-60% of your unpaid debt after the agreement is in place, then you are out of debt. The cons to this option are that your credit scores will be lowered, and you may need to close your account.

Pros Of Debt Settlement Include - A tremendous benefit is that a large portion of your debt (up to 60%) is immediately eliminated by your creditors. This will provide you immediate relief in your personal financial situation. It will also make the balance of your debt payments much more manageable.

After the settlement is complete, you can start the process of rebuilding your credit. You will no longer have the stress of trying to juggle the monthly bills, late payment fees, high debt loads, charges, and other factors. Instead, you can focus on managing your credit better and getting your financial situation back under control. Find other ways to improve your credit. Click here.

Cons Of Debt Settlement Include - There are definitely some negatives to the debt settlement process. The biggest one is the immediate negative impact on your credit score and ratings. To the credit reporting bureaus, going thru the debt settlement process is viewed upon as much like a home foreclosure; and your credit score may be immediately reduced to 500 or lower. While if you are considering settlement you have probably missed or will soon miss payments, and your score will be lowered regardless, a settlement may accelerate the reduction in your credit rating as the reduction happens immediately vs. over time. And while you can improve your credit score over time, for the next two years after the settlement is complete you will have to ensure you pay future bills on time, focus on repairing your credit, and you may need to work with sub prime lenders if you need a future loan.

Another con is that you may also have to deal with the income tax implication of a write off. The IRS sees debt settlement like receiving additional income or a cash gift or income. Depending on your tax situation and where you live, you may need to pay additional state income taxes.

 

 

 

Debt consolidation: This is probably your best option if you can make reduced monthly payments on your debts and bills. This is when you work with a debt relief company or credit counselor, and they will negotiate with your lenders, creditors or a collection agency so that they reduce the interest rates or the monthly minimum payments at which you pay your bills. In addition to a lower interest rate, another pro of debt consolidation and negotiation is that it can help to eliminate or reduce interest charges or late payment fees you have incurred on your accounts.

When the interest rates you need to pay are reduced from the consolidation process, it becomes much easier for you to manage your monthly payments. In addition, you get the opportunity to consolidate multiple types of bills and debts, such as credit cards, medical bills, and payday loans into a single monthly payment that's much easier to manage.

Pros of Debt Consolidation Include - Debt consolidation has benefited millions of people by helping them get out of debt. With consolidation, a debt relief organization or credit counselor will negotiates lower interest rates with your creditors. After this has been done, you just need to make one monthly payment to the debt consolidation company. The payment will be significantly lower than what you were paying in the past. The company will the handle paying all your accounts after the negotiation is complete.

 

 

Another pro is that the company or counselor will also handle any paperwork hassles, canceling and waive fees, and also oversee the closing accounts that may be required. They handle all this stressful, administrative work, and all the communication with the creditors and debt collectors. When you select this option, usually you can be out of debt in five years or less. Some credit card companies also have their own consolidation and hardship programs, and you can work directly with them. Read more information on credit card hardship programs.

Cons Of Debt Consolidation Include - A minor negative is that your credit score still may be impacted, but not by much. Debt consolidation will have much less of an impact on your credit score when compared to debt settlement. Most lenders and creditors will also put a temporary hold on extending you more credit or they may suspend your account until they see you are making regular payments. In addition, you need to still monitor your credit card accounts to be sure the debt consolidation company is making on
time payments and that the process is working.

The key to deciding upon debt consolidation vs debt settlement

The key factor when deciding whether debt consolidation vs debt settlement will benefit you more is whether you are capable of making any type or amount of monthly payments on your debts at a reduced rate. If you just can’t afford to pay anything, and your cash flow is low or falling, then you need to choose the debt settlement option in order to eliminate it.

Also, while debt consolidation and debt settlement can both lower and eliminate your debt, each will impact your credit rating, and the consequences will differ. Settlement will lower your credit rating more than consolidation.

The bottom line is that there is no easy or perfect solution for getting out of debt. When comparing the pros and cons of the two different options here, debt settlement can absolutely help you see an instant improvement in your financial situation, but at the cost of a more significant negative impact to your credit score. On the other hand, debt consolidation simplifies the process for you and it will also assist you with getting out of debt over time, and it has a smaller impact on your credit, however it does take time before you see the benefits of this option.