Under debt relief programs there are many options available to a debtor. These include Debt Settlement, Debt Consolidation, Debt Management, Debt or Credit Counseling and Bankruptcy. In a comparison between debt settlement vs. debt consolidation, a consumer may get confused. Both these methods are loan relief programs and present an alternative to bankruptcy.
Now, we will first analyze both the programs in detail and then compare debt settlement vs. debt consolidation.
In settlement:
The consumer needs an overall due of $10k or more. The consumer needs to have the dues consolidated. The consumer needs to hire a professional settlement company. The professional company negotiates with the creditors and threatens the lender that the consumer will have to file for bankruptcy in case the creditor turns down the settlement offer. The creditor never wants bankruptcy and eliminates the debt of the consumer by at least 50%. It depends on the negotiator whether the debt is eliminated by even greater percentage. When the settlement deal is signed, the consumer needs to pay the remaining amount to the lender either as one time payment or in six months installments.
In consolidation:
The debt of the consumer is not eliminated. The rate of interest is reduced on request and some of the costs of the debt are wiped off like, service tax, late fee etc. and the loan is re-amortized. The consumer now pays one monthly payment to the consolidator. The consolidator then distributes the same to the creditors.
Now we compare debt settlement vs. debt consolidation face to face.
In debt settlement you can achieve in eliminating 50% to 70% of total unsecured debt. But in debt consolidation you end up reducing loan burden. Debt settlement takes 1-3 years to complete while loan consolidation may take as long as 5 years. In loan settlement the consumer is not charged by the settlement firm in advance. They charge their clients only when they come up with successful results. While in debt consolidation the firms charge them a nominal fee per month. In settlement the consumer loses both the credit score and credibility but only during the settlement process. In consolidation they are intact.
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