Two popular types of debt consolidation are debt settlement and debt management. Though these terms might be used more broadly, the specific terms indicate two different ways to handle debt. They are not equally useful.
Debt settlement happens when you make a deal with collection agencies to only pay a percentage of the debt you owe. Usually, a collection agency will settle with you if you pay them 40 to 60 percent of the amount owed. If you have this agreement in writing, they are no longer able to pursue the debt on that account and cannot take legal action against you in an attempt to acquire it. You have to pay the amount agreed to in one lump sum, which can be difficult if you have had trouble paying on the account in the past.
Most people who choose to settle their debt go through a debt settlement company, however there is nothing that they can do that you can't do on your own. In fat, it's a bad idea to use a debt settlement company because they will charge you large fees to do what you can do for yourself. They'll allow you to pay them monthly for their services and to accrue money to pay off your debts, but you will not receive interest on it and they will not give it to your creditors until it has accumulated enough to pay off your accounts. You would be much better off saving money with interest to settle your debt, or make those monthly payments to the creditor yourself.
Forgiven debt also counts as taxable income. Depending on your tax bracket, you might end up paying more in taxes and fees to the debt settlement company than you actually saved by settling your debt. Debt settlement also reflects poorly on your credit report and will remain on the report for 7 years.
Debt management is different than debt settlement. Unlike debt settlement, you will actually pay off your debt in full. The debt management company, however, can help you get benefits that you can't get on your own, such as reduced interest rates, waived fees, and lower monthly payments. When you sign up for a debt management plan, most creditors will make your account current if you have been behind, which will improve your credit score. When you have completed the debt management program, you will no longer owe money to your creditors and your credit report will reflect that.
In order to benefit from a debt management plan, you must be willing to discipline yourself to stick to the schedule. You will no longer be able to use the credit cards that you have placed on the plan, so you must stick to your budget. However, if you are able to stick to the plan and see it through for a few years, you will be able to experience the financial freedom on the other side. Once you have completed the debt management plan, you will be free to pursue larger dreams such as owning your own home.
When you compare the two side by side, you'll see that debt management is more beneficial than debt settlement in most cases. With a debt management plan, you will be able to pay off your debts while not hurting your credit report further.
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Frequently Asked Questions
I have only been able to pay the minimum each ...
By: Joker Mike | 28-09-2008
I have only been able to pay the minimum each month in hope's of paying it off. But the fee,s keeps me back to where I started,how can I stop the fee,s ? And yes ,I am talking about my credit card .
Does credit cards have the right to close your ...
By: Lydia | 28-09-2008
does credit cards have the right to close your safe deposit box
I have 15oo in credit card debt. Stopped paying ...
By: suzi | 18-09-2008
I have 15oo in credit card debt. Stopped paying. I have no job, no bank account, no assets in my name. What can happen if they sue me and they receive judgement against me and still are unable to collect the money? Can they come after my husband. He is not on the account. What will happen to me?
Broke and getting sued by credit card co.
By: dinno | 05-09-2008
I am broke and being took to court for credit card debt. What should I expect to happen in court?
Can I cancel my debt consolidation program?
By: Geraldine | 31-08-2008
Can I cancel my debt consolidation program?
Payday hell
By: dmarie | 28-08-2008
Has anyone had any luck consolidating payday loans? How did you do it? Do the payday loan consolidation companies work?
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