Debt Settlement and Debt Consolidation Services Compared

Debt settlement and debt consolidation often come hand in hand, but it is not necessary to combine them. Settlement is the process of paying down one debt for lower than the remaining amount owed. Consolidation, by contrast, is the process of paying off multiple debts with a new loan at better terms. It is common for consolidation also to incorporate settlement, reducing the total debt remaining on each loan. Both of these options are forms of debt modification, so both will come with penalties along with rewards.

Penalties for Debt Settlement

The biggest penalty for settling debt is a drop in your credit score. When you settle, you are breaking a contract with the lender. Lenders would typically accommodate for this problem by charging you an additional fee. However, in settlement, these fees are waived, and you actually end up paying less than you owe. The lender cannot charge you fines because it agreed to this lower sum, so it will penalize your credit instead. It is not uncommon to see a drop of 100 points or more if you choose to settle debt. Your full report will also reflect the fact that settlement was pursued.

Penalties for Debt Consolidation

Consolidation typically offers less of a penalty if it is pursued without any settlement. When you consolidate, you do have the option of paying off your existing loans in full, including any penalties. Paying these penalties can eliminate the possibility the lender will knock your credit score down. In fact, you can even arrange for this in the negotiation for the payoff fee. In this case, consolidation will not save you any money. You will still have the same amount of debt as you had before, and maybe more, but you will save your credit score.

Rewards for Debt Settlement

When you settle debt, you have no obligation to the lender you settled with. The debt is forgiven, and you can walk away free of the liens against your collateral and free from creditors. Since you settled for less than you owed, your new loan will be much easier to manage. You will see lower monthly payments and a lower total debt obligation. It may take about 5 years to rebuild your credit, but you have avoided default or bankruptcy, which means you can recover from the problem without life-long consequences.

Rewards for Debt Consolidation

Many people consolidate simply to organize their finances. Instead of writing multiple checks to multiple lenders each month, the debt is organized into one simple monthly payment. This reduces the chance you will miss a payment and makes tracking your balance much easier. There are some circumstances where consolidation is even encouraged, such as student debt consolidation. You can consolidate many years of loans into one lump loan sum with most lenders without penalty, streamlining the process. If you do elect to settle some of the debt you consolidate, you will see the same penalties and rewards you would see with any settlement.

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