Should Debts Be Settled Or Consolidated? – Credit Counseling Options

Many consumers make the mistake of thinking that debt consolidation and debt settlement is the same thing. But there are very distinct differences between these two programs. Debt consolidation is the process of combining multiple debts into one monthly payment. Typically administered by a credit counseling agency, a debt consolidation program can lower your interest rates, reduce your monthly payments and help you get out of debt faster. Debt settlement is the process of negotiating a settlement with your creditors. A debt settlement program can get your debts reduced for less than what you actually owe. Which program is right for you? It all depends on your individual financial situation.

Debt Consolidation

Debt consolidation is designed to help consumers who are carrying heavy debt loads, have higher than normal interest rates and are in danger of falling behind on their bills. To qualify for this program, you should be either be current or only a few months behind in your credit card debts. Your expenses, including the payment for the debt consolidation program, can’t be more than your income. A credit counselor will most likely to perform a budget analysis to ensure that this program is feasible. Once you’re on the program, you’ll send one payment to the credit counseling agency administering your account and they will pay your creditors.

It typically takes anywhere from 36 to 60 months to complete a debt consolidation program. Because you’re paying back the debt in its entirety, debt consolidation typically doesn’t hurt your credit rating. In fact, many consumers find that they’re able to apply for a car or home loan after being on the program for one year.

Debt Settlement

Debt settlement is designed to help consumers settle debts that they’ve been previously delinquent on. If you’re more than 9 months behind in your credit card debts, you probably qualify for this program. A debt settlement company will review your debts and advise you how much they think you will need to get your accounts settled. If you don’t have the money already, you’ll have to start setting money aside and create a settlement fund. Once you have enough money saved to make a reasonable offer, they will contact each of your creditors and negotiate a settlement, which can be anywhere from 20% to 75% of the original balance. Once all your creditors agree to the settlements, you will make the lump sum payments and the accounts are paid off. You can either do the settlements all at once or create a settlement cycle where you pay off each creditor as you get the funds. How it’s done all depends on your debt settlement company.

It can typically take anywhere from 12 to 36 months to settle all your accounts. Debt settlement can have a negative effect on your credit rating for 5 to 7 years. You may have to pay income tax on the amount that you didn’t pay back to the creditors. While you’re saving the money to pay off your debts, your creditors could bring litigation against you to garnish your wages or place liens against you.

When Debt Settlement Crosses the Debt Consolidation Line

Unfortunately, because of the confusion between debt consolidation and debt settlement, some consumers that qualify for debt consolidation go the debt settlement route because they think it will save them money. And when you compare it dollars to dollars, debt settlement can be cheaper than debt consolidation. However, there are consequences that you need to consider before choosing debt settlement. Debt settlement can hurt your credit rating. Debt settlement can put you at risk of being sued by your creditors. With debt settlement, you may have to pay income tax on the amount you saved.

If you’re not sure what program you should consider, talk with a credit counselor. Most credit counseling agencies are familiar with both programs as well as other financial options. They can review your personal financial situation and help you select which one is right for you.