Debt Consolidation vs Debt Settlement

Wednesday, June 7th

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.

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Debt Relief Company FAQ

What is debt relief?

Debt relief is a process that helps people get out from under their ever-mounting financial obligations. This can be accomplished through Debt Negotiation, Debt Settlement, Debt Consolidation or Repayment Plans, among other strategies.

Do I qualify for debt relief?

You'll need to have a certain amount of debt to be eligible for debt relief, which varies according to which relief service you choose. Some require a minimum unsecured debt of $7500, while others specify that you need to owe at least $10,000. Also, some debt relief providers aren't licensed in all 50 states - so you may be eligible for debt relief but the service you're considering isn't available in your state.

How much does debt relief cost?

Believe it or not, many debt relief services are free! Most providers give you a no-cost consultation, analyzing your financial situation and making recommendations tailored to your needs. But, there are some fee-based services, especially if you want someone to negotiate with creditors on your behalf.

Why should I use a debt relief service? Can't I do it all by myself?

Many of the strategies used by debt relief providers can be done on your own, yes. But, in the amount of time it would take you to get up to speed and learn what those strategies are, you could be paying hundreds (or thousands!) of dollars in interest. It's almost always a smarter financial move to have the experts do the work for you.

What should I expect once I sign up for a debt relief service?

The first step is usually the complimentary consultation, where a representative will go over your debt situation and find out your goals, needs and timeframe. From there, it will depend on which approach you decide to take - but, for the most part, the debt relief service will be in charge of contacting your creditors and working out the details for reducing what you owe.

How long will it take to see changes in my debt situation?

No two consumers are alike - and debt relief strategies vary as well. Some services offer relief through a personal loan, allowing you to pay off high-interest debt with a lower-interest arrangement, so naturally your situation will change as soon as your loan is funded and used to reduce your monthly payments. On the other hand, if your service is negotiating with your creditors to reduce or eliminate what you owe, that can take several weeks to months.

Is there a guarantee?

Most of the time, there isn't. A few debt relief services offer a 100% customer satisfaction guarantee, allowing you to cancel your plan without fees or penalties. Read the fine print of any contract before you sign up, so you'll know exactly what's promised - and what isn't.

Are companies offering debt relief legitimate?

Debt relief may sound too good to be true, but it's a legal, well-known method for reducing the debt burden faced by many consumers. Although some fly-by-night services pop up from time to time, most companies offering debt relief have been in business for a decade or longer. You can always check for a company's listing with the Better Business Bureau for further confirmation that it's a trustworthy option for debt relief.