Debt Settlement vs Debt Consolidation

How does one wake up one day to find themselves crushed beneath a mountain of debt? Gradually, then suddenly. Most people don’t spend exorbitant amounts of money on extravagant purchases with a single swipe. Many are forced to resort to high-interest credit cards just to cover the gap between income and living expenses. Some may even succumb to the pressures of American consumerism, a culture that disguises wants as needs. Either way, credit card balances are snowballs that can easily turn into a financial avalanche.

So, what do you do when your debt becomes overwhelming? There are several debt relief options, including debt settlement and debt consolidation, available to individuals depending on their unique circumstances. Knowing the difference between programs can help you choose the right debt relief plan for you.

The terms debt settlement and debt consolidation are often mistakenly used interchangeably, but they actually entail two vastly different processes. Let’s dive into the fundamental differences between these two forms of debt relief programs.

Debt settlement

Debt settlement reduces the balance owed on your credit cards, not just your interest rate. In fact, this program is nothing more than good old fashioned haggling. Unlike debt consolidation or credit counseling where you pay back the full balance of your debts, debt negotiation requires that you pay only a portion of the balance.

Debt settlement programs typically take 3 to 4 years to complete. Though a good program may allow consumers to pay off their debts faster. For example, New Era Debt Solutions clients, on average, pay off their debts in just over 2 years.

There are, however, some drawbacks to debt settlement. The portion of your debt that is forgiven, i.e. your cost savings, may be viewed as income by the IRS, meaning forgiven debt may be subject to federal and/or state taxes. Settlements will also negatively impact your credit score, which could make low-interest loans for purchases such as cars or homes difficult to come by. Despite these disadvantages, you may still find the pros far outweigh the cons.

Debt consolidation

With debt consolidation, debt is neither forgiven or reduced. When you enter a debt consolidation program, you’re taking out a single, low-interest loan used to pay multiple creditors. While debt consolidation will not impact your credit score as debt settlement would, there are still cons you should carefully consider.

First, consolidation programs generally take longer to complete, about 3 to 5 years. Second, some types of consolidation, such as personal loans and home equity lines of credit, require you to put up some form of collateral (e.g. your home). This means that if you cannot repay your debt, your assets could be seized.

Which option is best for you?

Debt is nothing to be ashamed of. In fact, you’re not alone: the average American household has accumulated $16,000 in credit card debt. And if you think negotiating lower debt repayments constitutes a “free lunch”, you’d be wrong there too. If you’re unable to pay the full balance of your financial burdens, debt settlement is an ethical alternative to bankruptcy, offering you the chance to pay back a portion of your unsecured debt that would otherwise go unpaid.

If you’d like to review your options and find out if you’re a good candidate for debt settlement, contact our team of debt relief experts at New Era Debt Solutions.