Debt Settlement Vs Debt Consolidation?

Both debt settlement and debt reduction are designed to reduce and free you from your excessive credit. However, each one has their own consequence on your credit rating and future expenses. In choosing between debt settlement vs. debt consolidation, you need to determine the advantages and disadvantages of each process.

Debt Settlement

In debt settlement, a percentage of your debt is reduced right away by your creditor. As a result, you will find immediate relief in your monthly payments. The remaining monthly payments can be easier to handle.

With debt settlement, you can proceed with rebuilding your credit score from this moment on. Rather than making late payments and suffering from high interest rates, you can concentrate on better credit management.

However, there are certain disadvantages to debt settlement. The biggest downside is its instant effect on your credit score. Debt settlement is like foreclosure in the real estate industry. You can expect a score lower than 500. Although it may boost your credit rating, you will have to work with subprime lenders for the next couple of years.

In addition, settlement can have tax implications. The IRS sees it as getting a cash gift or income. Depending on the state you live, there might be additional state taxes that you will have to pay.

Debt Consolidation

Like settlement, consolidation is another avenue for getting out of debt. Here the creditor will work out lower rates with your creditors. Instead of several payments, you make a single lump sum payment to the debt consolidation firm who will take charge of settling your accounts. The debt consolidation firm will also take care of the paperwork, cancel fees, and terminate the accounts. With their help, you can be out of debt in a span of less than 5 years.

On the other hand, consolidation will have minimal effect on your credit rating. Unless you prove that you are regularly settling your account, most lenders will not allow you to take out credit. You need to make sure that the consolidation company is promptly settling your payments.

When choosing between settlement vs. consolidation, you need to bear in mind that there is no right formula for eliminating debt. The former can give your finances an immediate boost but will compromise your credit score while the latter has little impact on your rating but will require some time.

There are different factors that can have an effect on your choice between debt settlement vs. debt consolidation. Before making a choice, do some research and find some tips on how to choose between debt settlement vs. debt consolidation.