Debt Settlement vs. Debt Consolidation Loan

If you have found yourself in a position where your debt has accumulated and you are unable to continue the monthly payments you might explore debt consolidation or debt settlement.  Debt settlement and debt consolidation are vastly different and there are definite pros and cons of debt settlement and debt consolidation.  In the following we will review the differences and the various pros and cons to each.

Debt Settlement vs. Debt Consolidation Loan

What is Debt Settlement or Debt Resolution?

In short, debt settlement involves negotiating with your creditors to reduce the overall balances due.  The negotiations between debtor and creditor can be done between the parties directly or the debtor can engage a debt settlement company or an attorney.

What are the Effects of Debt Settlement or Debt Resolution?

Debt settlement can be beneficial to both sides.  The creditor collects on a debt that they may or may not have been able to otherwise.  The debtor saves money, as the negotiated amount will be less then what was originally owned.  In some instances you can reduce the amount owed by up to 65%, however, the typical settlement is around 35%.

While you may have received a favorable settlement, it is important to understand the disadvantages of debt settlement. When a debt is settled for less than the amount owed, the creditor may report the debt settlement to the credit reporting agencies, therefore lowering your associated FICO scores for a period of time.  The other important con to consider in debt settlement relates to the tax consequences.  A debtor must report the forgiven portion of a debt to the Internal Review Service (IRS), this forgiven debt in turn will be counted as taxable income.

What is Debt Consolidation?

Now we will turn to the basics of debt consolidation.  To begin the debt consolidation process, you must gather all bills, including credit cards, medical, loans, utilities, what-have-you.  Now that you have gathered all your various bills you will have an idea of how much you will need to consolidate and are ready to secure a loan or credit card that is large enough to pay off your other debts.  Once that loan is secured you will contact your other creditors and arrange payment in full of those loans, bills and or credit cards.  Like the debt settlement process this can be completed by the debtor personally or they can engage a debt counselor or consolidation company to assist them.

What are the Effects of Debt Consolidation?

There are several benefits of debt consolidation which vary depending on the type of debt consolidation you choose.  First, by having only one monthly payment you may find it much easier to budget accordingly and this may give you a fresh start to saving.  Secondly, you will more than likely be saving on interest by consolidating the various bills into one with a lower rate.  Third, and perhaps the most beneficial, you will avoid further damage to your credit score.  By paying off the various credit cards or loans your credit score will receive an increase and with continually timely payments on the one line of credit your score will continue to rise.

The negative aspects of debt consolidation relate to how and where you secure the consolidation credit line and if you are committed to changing your financial habits.  If you are unable to secure a 0% credit card and move your various bills onto a credit card or line of credit with a high interest rate, that interest rate can rack up quickly and create an even larger balance.  The other serious item to consider, if you are not committed to changing the way you use credit cards and continue with your old habits you will simply continue to rack up a larger and larger debt.

As there are many pros and cons to debt settlement and debt consolidation it is wise to consider both options and speak with a Long Beach debt settlement attorney or a debt consolidation company when reviewing what option is best for you.

About Marc Aaron Goldbach

Marc Aaron Goldbach has worked tirelessly to develop a successful bankruptcy and civil law practice for clients located throughout Los Angeles County. Mr. Goldbach at GoldBach Law Group have represented a wide array of small businesses and individuals with 100% client success rate. Mr. Goldbach is always available to answer questions and willing to guide you through the entire legal process.
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