There are several ways to deal with mounting debt. Debt settlement and debt consolidation may both be viable options, but it’s important to
assess which is the best solution to help you eliminate your current
debt and improve your financial situation moving forward.
What is debt settlement?
Debt settlement allows you to negotiate with creditors to pay off
delinquent, unsecured credit accounts and personal loans over a
specified time (or all at once) for an amount less than what you owe.
For example, a person with a credit balance of $10,000 may be able to
pay $4,000 to close and “settle” the account and have the remaining
$6,000 forgiven.
When you have more debt than you can pay off and
have fallen behind on payments this is an option to consider. It’s
generally best to negotiate with creditors when you’re between 90 days
and
si months past due on your payments. This is a feasible option
only if you’ll have the funds to pay the negotiated amounts within the
agreed-upon time, and it’s best if you can complete your settlement plan
within a couple years.
What is a debt consolidation?
Debt
consolidation usually means taking out a large loan from a creditor to
cover the balance of all your existing loans and credit cards. The loan
could be a personal loan from a bank, a peer-to-peer loan or, in some
cases, a home equity loan. It can sometimes be accomplished through a
balance transfer credit card.
The goal with any form of debt
consolidation is to get favorable terms that include a much lower
interest rate than you’re paying on the current debt. This can be a good
option if you have consistent income and you take steps to change any
behaviors that would lead you to again grow your debt. However, if your
credit is already negatively impacted by your debt challenges, (like
poor debt-to-income ratio, missed payments, etc.) you may not be
approved for a new loan or credit card account or, may not get a better
interest rate than you currently have.
Comparing the pros & cons
Debt
settlement can quickly halt any debt spiral you may be trapped in and
can be a quicker and lower cost option than debt consolidation. Ideally,
you’ll complete your payoff plan in a couple years with debt
settlement. By comparison, consolidated loan payments may last for
years.
With debt settlement, your current credit accounts will be
closed. If you miss your scheduled payment, your agreement with your
creditor can be nullified, so it’s important to be disciplined in this
process.
Once you’ve completed your settlement payments, you can
apply for new credit accounts and will be able to move forward with your
financial goals.
Perhaps the biggest benefit of debt settlement
is that it allows you to negotiate paying less than you owe. Just bear
in mind that debt settlement has a negative impact on your credit. In
order to begin negotiating with your creditors you’ll need to be at
least 90 days past due on your payments. Those missed payments are
reported to the credit reporting agencies and your scores will take a
major hit. It’s also likely you’ll have to deal with harassing
collection calls and there is the risk of being sued by your creditors
until your deals are locked in place.
Debt consolidation, however,
does not run these risks and may be a better alternative if you haven’t
yet fallen behind on your bill payments.
One of the biggest
benefits of debt consolidation is that it can preserve your credit
score. And, because you’re paying your accounts in full (and you
hopefully haven’t missed any payments), you won’t face collection calls
or lawsuits.
Keep in mind, though, that you may be setting
yourself up to go deeper into debt, especially if it’s a spendthrift
nature that got you into trouble to begin with. It’s important that you
don’t incur new debt as you try to pay off your existing balances.
How to assess debt settlement vs. debt consolidation
As
you consider both options, take an honest look at the amount of your
debt, your budget and your available funds/income. Identify short- and
long-term financial goals and how your credit health will affect these.
If
you’re considering debt consolidation, look at the total debt you have
and the average interest rate you are paying. You can figure out how
long it will take to pay off each card individually using a credit card payment calculator. Then review your budget to assess how much money you can pay toward your debt each month. You can use this debt consolidation calculator
to see what loan terms will work for you. You’ll need to check with
potential lenders to find out if you qualify for these terms. And be
sure to consider if you have the discipline to either close other
accounts or use them only in cases of emergency.
If your current
debt challenges or budget prevent you from consolidating or you’d like
to resolve your debt faster and are not as concerned with the impact to
your credit, start by assessing if settlement will work for you.
Consider:
- Your balances. Some amounts are too small for settlement.
- Your creditors. Each company has its own approach to dealing with delinquent accounts and their policies change periodically.
- Your cash flow. Do you have the funds to settle all your debts within a timeframe time that reduces your risk of being sued?
- Your budget. Can you pay your settlements on time and still pay your other bills?
- Additional
funds. Are there other sources of funds, e.g., something you can sell,
loans from family or friends, that you can access?
If debt
settlement is the right option, you’ll work with a debt settlement
company to negotiate on your behalf or you can negotiate directly with
each of your creditors.
If neither option fits your situation, you may want to consider debt management or bankruptcy.
This article originally appeared on Resolve and was syndicated by MediaFeed.org.
Featured Image Credit: iStock.
