When it comes to debt relief, there are several different types that can provide
effective results to those who need to either get rid of their debt through a
structured payment program or in one lump sum payoff. Quite simply, this is the
difference between debt consolidation and debt settlement. Before deciding which
one is right for you, it may help to know a little more about each option and
how it will affect your future ability to obtain credit.
Many people may
not realize this, but there is a big difference between debt consolidation and a
debt consolidation loan. The latter involves a lender granting money to be used
for the purpose of paying off other debts in exchange for one single monthly
payment. Debt consolidation, on the other hand, is a term used by many
non-profit organizations that offer debt management services without actually
issuing a loan. With debt consolidation, your bills are still combined into one
lump sum payment and payable directly to the non-profit agency who then
distributes individual payments to your creditors based on a customized
agreement.
In most cases, a debt consolidation program will allow
debtors who are seriously delinquent with their bills to regain current status
with creditors. Because a debt management company works to negotiate lower
interest and monthly payments with each creditor, most individuals will see
their credit reports updated to "Paid as agreed" within 1-3 months of
consecutive monthly payments through the new program.
Debt settlement is
a fast and permanent solution to debt problems, but it often requires a lump sum
payment in order to satisfy the entire debt. As the name implies, debt
settlement allows you to settle a debt at a fraction of the account balance.
Depending on the length of delinquency, some debts may be settled for as little
as 20% or as much as 80% of the total account balance. When you enter into a
debt settlement with a creditor, the account will commonly be reported as
"Settled account" on your credit report. Although this is considerably less
desirable than "Paid as agreed", it shows that you have made a good faith effort
to repay the debt in accordance with your ability. At the same time, a notation
of a settled debt is much better than continued late or missed payments or, in
extreme cases, even bankruptcy.
Once a debt settlement agreement has been
reached and paid in full, the lender will "forgive" the remaining balance on the
account. In some instances, depending on the amount of forgiven debt, some
lenders may issue an income form to both you and the IRS. This means that a
portion of the debt may be considered as income and, therefore, may be taxable.
Once you begin to fall behind with debt payments, it's important to
regain control over your finances as quickly as possible. Not only can a poor
credit rating affect your ability to get credit, but it can also hinder the
potential for future employment. Today, many employers perform a credit check on
their new employees and it can make a great deal of difference whether you
attempted to rectify your financial problems or just ignored them. At the end of
the day, the best way to handle budget woes is to face them with the knowledge
that there are options to getting out of debt.
