Debt Settlement vs Debt Consolidation

There are many advertisements circulating on the internet and television about the benefits of debt consolidation and debt settlement. Many people assume that these two terms represent the same financial action. While these debt relief programs have many similarities, they are actually quite different. Both programs have their own respective good and bad qualities and both are used for different purposes. Both programs have the eventual result of controlled finances and will eventually help you to clear debt, but they have different ways of obtaining the end result.

Debt Consolidation

A debt consolidation program creates a way for an individual to condense all their unsecured debt into a single monthly payment. The use of a loan to repay the accounts is generally the way that the debt is handled. Credit counselors can, on your behalf, negotiate a lower interest rate on these accounts, remove late or over limit fees and bargain for a lower pay off rate. They cannot, however, remove actual charges from your card that were made legally.

When you consolidate your bills in this manner you will be able to pay them all off at once using a secured loan. More often than not, this loan is based off of the equity in your home. You will have a much lower interest rate when you pay your debts off using this method and you won't have to pay as much money each month as you would have you creditors. When you go online you can get a free debt consolidation quote from these companies.

The drawback to using this method is that the accounts generally remain open. You will have the ability to charge them right back up again if you are not cautious of your credit usage. This can place you in a deeper debt than when you first began the process. Using the debt consolidation method can be very helpful to regain financial control only if restraint is used on the remaining open accounts. Without restraint, the debt simply grows back.

Another downside to unsecured credit card debt consolidation is that it will take a longer time to pay you debt off. This causes you debt to grow larger due to the interest. The longer you're indebted, the more your debt will grow. So you will probably end up paying more money overall.

Credit card debt negotiation, better known as debt settlement, has similarities with consolidating your debt, but quite different none the less.. A debt settlement attorney will represent you to your creditors and negotiate a pay off balance. They will be able to stop interest from incurring on the account, have charges and fees removed in an effort to reduce the debt, and, possibly, reduce the overall repayment amount of the total debt.

Settling credit card debt can reduce your debt by significant amounts because you will be closing the account permanently. The counselor can arrange a final payoff for a lower price. You must remember though, you will not be able to use this credit account again. The account will be paid off and closed.

Debt settlement companies will have you pay them a monthly sum. Some of this they keep as their wage, and some of it goes into an account. The money in the account will eventually be used to settle the debt.  The creditors won't get paid in the meantime, which makes them think you're going bankrupt. This is why they will accept a settlement payments.

A drawback to the settlement program is that you will no longer have any available unsecured credit. It will take you a minimum of 18 months to start rebuilding your credit again. The benefits are that your credit report will reflect the accounts as paid off, and you should be able to reestablish credit easily.

Both programs can help you in a time of financial crisis. It is up to you, as an individual, to decide which program better suits your needs. Be sure to do a lot of research, and never hire a debt relief center before you have checked their reputation with the BBB.

Either program is a fine way to keep yourself out of the bankruptcy court. With the economy fluctuating as much as it has lately, bankruptcies are on the rise. You can avoid this issue if you take control of your finances before it is too late. A bankruptcy will remain on your credit report for 10 years, making it nearly impossible to reestablish credit in the future. Debt consolidation or settlement will not have the same effect on your credit report or score.

In very little time, once you are financially stable again, you will be able to establish and use credit again freely.