Debt Settlement vs Consolidation

Share this Image On Your Site

</p><br /><br /><br /><br /> <p><strong>Please include attribution to unitedsettlement.com with this graphic.</strong></p><br /><br /><br /><br /> <p><a href=’https://unitedsettlement.com/debt-settlement-vs-consolidation/’><img src=’https://3ch3r11chteb1l8vgu8g1hn8-wpengine.netdna-ssl.com/wp-content/uploads/2020/02/Debt-Settlement-vs-Consolidation-768×3628.jpg’ alt=’Debt Settlement vs Consolidation’ 540px border=’0′ /></a></p><br /><br /><br /><br /> <p>

• Debt settlement and debt consolidation are debt-reduction strategies.
• They have different functions:
  • Debt settlement usually reduces the total amount you owe.
  • Consolidation combines all of your debts into one monthly payment.

How Does Debt Settlement Work?

• Usually only available for delinquent accounts with several months of missed payments.
• Debtors need to show an inability to pay the original amount.
• Certain debt savings from debt settlement are taxable.
• Step-by-step:
  • A debtor negotiates with creditors to try and reduce the total amount owed.
  • Successful negotiations result in a lower payoff amount.
  • The new amount is documented in writing.
  • The debtor sends a monthly payment to an escrow account.
  • Once the account has enough money, the debtor usually pays it off in one lump sum.
• Why do creditors agree to a lower payoff amount?
  • There’s a lower chance they’ll get the money back the longer a debt is unpaid.
  • Creditors can cut their losses by offering a lower payment amount.
  • Settlement helps lower the risk of a debtor filing bankruptcy and having debt discharged.

How Does Debt Consolidation Work?

• Good for people with lots of different unsecured debt.
• Combines multiple unsecured debts into one monthly payment.
• Consolidation can involve a Debt Management Plan (DMP):
  • The debtor consults with an experienced credit counselor.
  • The counselor gives actionable advice to control expenses.
  • The debtor, credit counselor, and creditors create an agreement for debt repayment.
  • The debtor pays one combined monthly payment to the counseling agency.
  • The agency allocates funds from the monthly payment to individual creditors.
  • Credit accounts are closed, which can hurt credit scores.
  • A DMP appears on credit reports but does not hurt credit scores.
• Or a Debt Consolidation Loan (DCL):
  • The debtor takes out a new loan.
  • The new credit account often has lower interest rates or payment amounts.
  • Funds from the DCL are used to pay off all existing unsecured debt.
  • A DCL allows a debtor to focus on one streamlined monthly payment with one creditor.
• Consolidation loans aren’t taxable.

Which One is Right for You?

• Debt settlement could be a good fit if you are financially unable to pay back debts.
• Debt consolidation could be best if you want to simplify multiple payments.