Something On Finance

Debt settlement and debt consolidation are very different processes. Debt settlement is a bargain made between the debtor and the lender to eliminate a debt with a payment of less than the full balance.

Consolidation means combining the debt into a single payment at a lower interest rate. Consolidation may be made by taking out a loan to cover the debt or by agreeing to work with a third party who will collect the payment and distribute it to the creditors for a fee.  Both options have positive and negative aspects that should be considered when you are deciding how to get out of debt.

Debt settlement is a great option because you are paying less than you owe. You'll want to find a reputable debt settlement firm to negotiate with your creditors.

With debt settlement, be aware that your credit report will show that the debt was legally settled for less than the full balance, and that is going to stay on the report.

Debt consolidation loans don't eliminate the debt. You are trading one debt for another. It is possible that the new loan has significantly lower interest, which might be helpful, but if you have to use some personal property as collateral and subsequently default on the loan, you will also lose the property.

A debt management plan is a consolidation of all of the unsecured debt into a single monthly payment at a lower interest rate. The process generally includes a counseling session to review the budget and the debts. A certified counselor should help you determine whether a debt management plan is appropriate to your situation. He will then determine a minimum payment and explain any fees associated with the program, as well as how long it will take to pay off the debt.

There are many positive aspects of a debt management plan including lower interest, saving money over time, improvement to the credit score with the elimination of debt, and a reduction in the time and stress involved in managing multiple payments. However, there are a few negative consequences:

• The credit cards must be closed, although some plans allow an emergency card.
• There will be a decrease in the credit score when the cards are closed, although it will improve as balances are reduced.
• The monthly payment will be constant for the life of the plan, as opposed to going down as the balances decrease.
• Some creditors will note on the credit report that a third party is managing the debt.
• Fees

No matter how you choose to get out of debt, remember, the goal is to pay down debt — and soon.