Difference Between Debt Consolidation and Debt Settlement

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If you are struggling to pay off debt, you may have heard about debt consolidation and debt settlement — two financial strategies to manage your debt. While these methods may sound similar, they function differently and are often used to resolve specific issues. 

Contact Loan Lawyers for a free consultation with a debt defense lawyer to learn more about debt consolidation vs. debt settlement.

What Is the Difference Between Debt Consolidation and Debt Settlement?

There are a few key differences between these two methods of debt management. First, debt consolidation combines debts from multiple creditors into a single debt that may have a better interest rate and more manageable terms for the debtor. Debt can be consolidated through a balance-transfer credit card, personal loan, home equity loan, or debt consolidation loan. This method may offer advantageous terms, such as a lower interest rate that allows the debtor to save money. It can also help the debtor pay off debt sooner and reduce the payments they must make.

Debt settlement involves purposefully withholding payment from a creditor for a period, typically two or three years. The debtor then attempts to settle the debt with a much lower lump-sum amount. They may try to negotiate debt resettlement or hire a for-profit company to help. However, it can be risky in either case.

Pros and Cons of Debt Consolidation vs. Debt Settlement

There are advantages and disadvantages to each debt management strategy. The pros of debt consolidation are:

• Fewer payments to manage
• Lower monthly payments due to a lower interest rate or extended payment schedule
• Credit may improve if the credit utilization ratio is reduced

The cons of debt consolidation include the following: 

• Original debt is not eliminated but extended over time
• Bad credit may prevent a debtor from getting a lower interest rate 
• There may be fees involved
• The pros of debt settlement are:
• Opportunity to settle for a much lower amount, saving significant money
• Possibility to settle relatively quickly

However, there are cons of debt settlement, such as: 

• No guarantee that a creditor will agree to settle
• Accrual of late fees and interest charges while payments are being withheld 
• Potential damage to a debtor’s credit score
• Possibility of being scammed by debt settlement companies

Debt Consolidation vs. Debt Settlement: Which Is Better for You?

You should consider several factors when determining which financial strategy is better for you. The main issues to take into account include the following: 

• How much debt do you owe
• Whether you are delinquent and, if so, how far behind you are
• Your credit score
• Your ideal timeline for paying down debt

An experienced debt relief attorney can evaluate your financial situation, explain your options, and help you choose the best strategy for your case. 

Click for the difference between Chapter 13 and a debt management plan.

Contact Loan Lawyers Today for a Free Consultation

If you struggle to manage your debt, contact Loan Lawyers today for a free consultation. Our foreclosure defense, debt defense, and bankruptcy law firm can help you find the best solution for your case. We work directly with each client on a personalized, detailed approach to solving debt problems.