Debt settlement is a process where you sit down with your creditor and agree that you would pay him a certain sum in full settlement for monies owed by you. The creditor finds this useful in the fact that it is better that he gets some money instead of living with the fear that the stoppage of monthly payments that have already taken place could become permanent and cause a complete loss to him . As a debtor you are able to settle the amount for a lesser amount than you would have paid if you had continued to make the monthly installments.
Debt consolidation takes place when you avail of another loan at lower interest rates or a fixed interest rate. This loan lets you pay off the existing loan in full while accepting the burden of a fresh loan, which has slightly better terms.
These options, debt settlement and debt consolidation offer you the chance to reduce your debt or eliminate it all together. But they can have further effects in your credit history and affect you in the future for all your financial dealings, as most lenders view these differently.
Debt settlement has the advantage that it will wipe off your debts immediately. This gives you immediate relief in your future monthly payments, and thus makes your future budgeting much easier. You can then focus on managing your credit, so that you do not get into such a similar situation once again. Unfortunately credit rating companies view this method as a foreclosure and you are considered a higher risk, which could affect all future interest rates that financiers would charge you. The IRS views this as your having received a gift or income and may tax you additionally during the year in consideration.
Debt consolidation also helps you to get out of debt by taking on a new loan, with better rates, which in turn reduce your monthly outgoings and thus enable you to manage your debt better. You make only one single monthly payment to the debt consolidation company and they in turn arrange to make all the other monthly installments that you had originally entered into with various creditors.
Creditors will suspend further credit, until they see that the new company which has arranged your debt consolidation is making regular payments.
There is no perfect method of getting out of debt. It is after all the effect of your having mismanaged your budget and its inflows and outflows, and not having exercised prudence in you’re buying of assets. There are credit counselors available who will assess your situation and advice you of the correct steps to take. But ultimately it is in your own hands, and the care and sane approach that you adopt in your finances that can ultimately get you out of the debt trap.
Debt settlement can reduce your debt by as much as forty percent, but it would mean that you would have to arrange for the cash to settle this reduced amount, which is quite a feat for someone who has already mismanaged his finances so that he has got into debt.
Debt consolidation just means that you are adding one more to the list of your creditors, even though the overall cost to you has reduced. The situation can only really improve if you are very firm about not undertaking any new additions on your credit that could cause you to slip back into debt once again. You should definitely not get into a situation where you have to take a new debt consolidation loan to allow you to repay the previous one.