Difference Between Debt Consolidation and Debt Settlement

Debt Settlement (DS) --> It is a process, which involves negotiating with your creditors to settle your debt for amounts significantly less than you currently owe. People not able to bear the burden of huge debts anymore or on the verge of bankruptcy are advised for debt settlement.

Debt Consolidation (DC) --> It is a process in which all the bills and debt whether secured or unsecured are combined together into a single payment, usually resulting in lower monthly payments. Often debt consolidation involves many unsecured loans (such as credit card bills, medical bills, etc.) into a single payment but with collateral backing it up. This is then referred to a secured loan. There are two types of programs under debt consolidation, i.e. Debt Consolidation Service and Debt Consolidation Loan.
a) Under Debt Consolidation service, debt solution companies negotiate with the creditors to lower down the interest rates and monthly payments.
b) Under Debt Consolidation loan, a lower interest loan is provided to the debtor in lieu of multiple high interest loans and bills, in order to pay off his debt quickly.

Lets come to the differences between Debt Consolidation (DC) and Debt Settlement (DS), which are given below:

1) In DC debt isn't reduced, it remains the same, only interest rate is reduced, but in DS debt is reduced to substantial level and also the interest rate is reduced.

2) In DC interest rate can be reduced to 50-75% depending on the debt, whereas in DS the interest rate can be reduced down to 40-60%.




3) In DC though the rate of interest is reduced, one has to pay the whole amount, but in DS once you repay 40-60% of your outstanding dues, you're legally out of debt.

4) In DC the credit score of the debtor isn't affected and in some cases there is a positive impact on it, if the bills are paid on time, on the other hand DS can severely damage one's credit score.

5) In DC all the secured and unsecured loans are combined together into a single secured loan, which are associated with collateral. So in case debtor fails to pay the loan he has to loose his property. But in DS creditors are at constant risk in loosing their money.

6) Usually, you can be out of short term credit card debt consolidation in five years or less but in DS the payment period is more.

7) If good credit manners are maintained a debtor with DC can apply for fresh loan and can get it, but a person with DS will affect their ability to get credit at favorable interest rates for couple of years. In fact, the Fair Credit Reporting Act states that negative information must remain on a credit report for a minimum of seven years.

Now its upto debtors and also depends on their financial position which plan to go for.

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Debt management companies - Why you should be careful about them

If you are drowning in debt and desperately searching for a way out, then a debt management program can really work for you. There are many companies in the market that offer different kinds of debt management program. But, choosing a debt management company has never been an easy task. There are many companies which have been sued by the FTC and Attorney Generals because of their fraudulent activities. So, it is very important to make sure that the debt management company you are selecting is a reliable one and their debt management program will not land you in a financial situation worse than before.

This is what happens if you chose a wrong debt management companies

In order to choose a debt management company, which can really offload your debt burden, you should keep in mind the following things:

• Don't forget to check the reliability- To be sure of the company's reliability, check its BBB rating. Find out how many complaints have been listed against the company and how many of them have been resolved. You should also gather information about the company from your local consumer protection agency and the State Attorney General. Also find some feed backs in various forums on their performance. If you find that the debt management company holds several unresolved complaints, don't rely on them for solving your debt problems.


• Don't get carried away by the non-profit status- Don't be misguided by the non-profit status of the debt management companies. There are many non-profit debt management agencies which charge high level of fees for providing debt management services. You should keep in mind that the non-profit agencies are also running their business to make money. The only difference is that, these agencies distribute their earnings in a different way. In many cases, the debt management companies use their non-profit status as a marketing tool.


• Get a written contract- Before enrolling for a debt management plan; make sure that you get a written contract. Carefully read all the terms and conditions before signing the contract and before making any payment. If the debt management company refuses to give you a written contract, just move on.
  
  
• Remember removal of negative listing cannot be guaranteed- If a debt management firm promises you to remove negative items from your credit report, you should better avoid them. This is because, no debt management company has the authority to remove negative listings from anyone's credit history; they can only try to negotiate with the creditors and the credit bureaus. So don't get impressed at their false commitment.


• Make a point that the debt management firm requires complete information- Always remember that a debt management company requires all of your current debt account statements before telling you about the fees and the debt reduction time. If a company gives you a quote without knowing about your debt accounts, interest rates on your loans and your creditors, then you should not consider it as a reliable one.


• Think before you stop making payments- Your debt management company may tell you to stop paying your creditors, once you enroll for the debt management plan. But don't stop making payments unless the debt management firm starts paying on your behalf.

Do not fall into these ad traps.

Always remember that it is worth going an extra mile for judging the trustworthiness of a debt management company, before delegating them the responsibility of debt reduction. Visit various debt consolidation communities and take expert's guidance before taking the important decision.

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Debt Negotiation - How is it Helpful?

Debt Negotiation is another way to pay off your debts. If you are unable to pay off your unsecured debts, then the debt settlement companies will negotiate with your creditors or Collection Agencies to reduce the amount of your debt. The debt settlement company may reduce 40 to 60 percent of debt that you owe to the creditors and the rest of the amount is forgiven. The creditors may accept for debt negotiation or debt settlement on certain individual situations like, you have lost your job, medical emergency or if bankruptcy seems the last option to you. The debt counselor will review your situation to judge whether debt negotiation is possible in your situation or not. The counselor will also prepare a realistic budget for you so that you have an easy cash flow to pay your debt.

How You Will be Benefited After Debt Negotiation?

• Debt negotiation will help you to reduce your payments so that you can afford to pay off your debts faster.

• You can also avoid extra charges like late payments.

• You can also avoid the harassment of creditors or the collection agencies.



Credit Effect of Debt Negotiation:

Only if you are more than three months late then your creditor may agree for debt negotiation. So this will effect you credit report to a certain extent. The amount that your creditor is forgiving will be considered as charge off and this will also be mentioned on your credit report. By the way, after the debt negation, if you pay your debts on time, your credit score is going be improved. So if you are tired of your debts and if you are not finding any solution to pay your debts off, go for debt negotiation and have a Happy Debt free life!

Feel free to share you comments and Suggestions.

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How Debt Consolidation can help you?

Most of us, in this financial crunch, are suffering from huge credit card debts and other unsecured debts and the problem is the interest rates of these unsecured debts are much higher than secure debts. In this situation, Debt consolidation is a good solution to choose. Most of the debt consolidation company will review your debts and work out with your creditors so that you can pay your debts with an affordable rates and terms. Both, your interest rates and monthly payments will be lowered through the debt consolidation program.


You can go for debt consolidation if you are two or three months behind and can't see any possibilities to catch up with your debts in near future. If you go for debt consolidation program, all your accounts that you are consolidating, will be closed. You will not be able to use those accounts any more. So it will be better if you close those accounts on your own because if the companies close those accounts, then it will have an adverse effect on your credit report.

In a debt consolidation program, you will not get any new loan to pay off your debts but the debt consolidation company will manage all your account and you will have to pay only to the debt consolidation company. When you are back on track and into an affordable payment plan, it is better to follow it through out so that you can get out of those debts. Also maintain all the documents and records. If you have any further problems regarding your payments then contact the debt consolidation company directly and inform your problems to the debt them. They will take the necessary steps to solve your problems. Have a happy Debt Free Life.

BTW feel free to share your thoughts and suggestion :)

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