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Which one is better? Debt Settlement or Debt Consolidation

Published by admin on December 18, 2009

Which one is better? Debt Settlement or Debt Consolidation

Both debt relief and debt consolidation can reduce and eliminate debt. But each will have a different impact on your credit score and future financial opportunities. Before you choose either option, educate yourself about the pros and cons of each of the two options that you have available.

The Benefits of Debt Settlement

The debt settlement procedures mean that a portion of your debt is immediately wiped out by your creditors. You will find instant financial relief in your monthly budget. And the rest of your debt payments are much more manageable and easy to make.

You will also discover that you can begin to rebuild your credit score at this point. Instead of juggling with late payments, high debt loads, and other negative factors, you can focus on managing your credit better all this once you get out of debt.

The Disadvantages of Debt Settlement

There are some downsides to debt settlement. The largest is the immediate impact on your credit score. Debt settlement is seen much as a foreclosure, so this means that your score will be 500 or lower. And while you might improve your credit score, the next two years you will have to work with sub prime lenders.

You will also have to deal with the tax consequences of a write off. IRS sees debt relief as receiving a cash gift or income. Depending on where you live, you also have to pay additional state taxes.

The Benefits of Debt Consolidation

Consolidation of debt can also help you to get out of debt. With debt consolidation, you can negotiate lower interest rates with your creditors. You will have to make a monthly payment for a debt consolidation company and they are going to handle paying all your accounts.

They also deal with some paperwork that has to be completed, cancellation fees, and closing accounts. Normally you can be out of short term debt in five years or sometimes even sooner.

The disadvantages of Debt Consolidation

Debt consolidation will have little bearing on your credit score. Most lenders will temporarily put a hold on the extension of the credit until they see that you make regular payments. You still need to monitor your accounts to make sure the debt consolidation company makes one-off expenditure.

Picking The Right One

There is no perfect solution to get out of debt. Debt relief can help you see an immediate improvement in your financial life, but at the expense of your credit score. Debt Consolidation programs simplifies the process with minimal impact on your credit, but it’s going to take some more time.

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