The NACBA (National association of Consumer Bankruptcy Attorneys ) reported in October 2012 that ‘The private debt-settlement industry remains robust. More than 500,000 Americans with approximately $15 billion of debt are currently enrolled in debt settlement programs, according to industry estimates. And there is room for further growth: One in 8 U.S. households has more than $10,000 in credit card debt.’
Being in debt can be a worrying situation for the debtor, especially when many creditors use judicial and statutory processes to have their debts cleared. As a result of these situations, anyone who is in debt, at some point or the other decides that he has to get rid of that debt and live a debt free life. For that you need to know the options you have that could help you free yourself from debt. Any debtor basically has two options which are debt settlement and debt consolidation to relieve themselves of the stressful condition of debt.
In order to choose, a good option for you, you need to understand what is meant by debt settlement and debt consolidation and why or how it can be useful for you. Though each is individually different from the other, yet debt settlement and debt consolidation do have fundamental similarities between them. These commonalities arise from the fact that both are methods that aim at making your debt more manageable.
Debt settlement is a process in which your debt is negotiated with one or more of your creditors where, the amount to be paid to the debtors is substantially reduced and you come to a settlement, where you square off the amount that needs to be paid for a lesser one. After a settlement is reached between the debtor and the money lender, the debt is considered paid in full even though only a portion of it has actually been paid.
Debt consolidation is a situation where a borrower takes out one big loan in order to pay off other smaller debts, which typically achieves a lower interest rate. This way, a debtor aims at paying one bill every month instead of several bills, which is more convenient financially.
The highs and lows of debt consolidation and debt settlement-
Debt settlement is a situation that is comparatively better off for the debtor because he/she is actually rid of the loan once and for all. Also the process benefits both parties, even though the scales are tipped slightly more in favor of the debtor. A successful settlement is where a person in debt squares off the due amount for a substantially lower amount, which allows the crediting company also to clear their credit record books. As a debtor, this is definitely a huge advantage provided you can bring the company/individual you owe money, to a settlement table.
For those who are suffering from a low credit score a debt consolidation is a good option as it is a relatively safe solution when your top priority is to get out of debt and get your finances back on track, while also improving your credit score.
Why would a creditor settle for a debt settlement?
Often, a creditor is ready to accept a partial payment of a debt because they see it as an opportunity to, collect on a debt that otherwise may have been erased in bankruptcy. In order to avoid such a situation, often the creditor is ready to settle for a partial lump-sum payment. This may not the case in all situations though and if the amount due is significantly high, but depending on case to case and the relation between the debtor and the creditor and their situation
financially it may often be a preferred solution.
The highs and lows of debt consolidation
The good part of debt consolidation is that it can save you money in interest. But on the other hand, the downside is that in many cases a debtor is trading several smaller unsecured debts for a larger one, so effectively you are still a debtor who is not really free of debt. You still owe the creditor the total loan amount, plus interest.
Why we think you should consider a debt settlement instead of debt consolidation-
- A debt settlement, gives you the feeling of being totally debt free, which does not come from debt consolidation.
- As a debtor, you no longer owe your original lenders.
- While debt settlement involves dealing with the creditor, it is an arrangement creditors prefer too, if handled well.
- Opting for debt settlement means your debt is gone forever; debt consolidation on the other hand may leave you in debt for a longer period of time.
- A debt consolidation requires you to put up something as collateral, which could be either your house or your car, in case of nonpayment, you run the risk of losing your collateral too.