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Debt Settlement vs Debt Consolidation

In view of the uninformed general perception interchanging debt settlement programs with that of debt consolidation, an article on debt settlement vs debt consolidation is just what everyone needs.

Definition: Debt Settlement vs. Debt Consolidation

The confusion between these two programs or strategies is understandable considering the fact that both stem from the same concept of providing debtors with debt management strategies or solutions to their debt predicament (financial panic may seem more appropriate).

Debt settlement refers to a debt management mechanism where a portion of the debt is forgiven or written off by the creditor in exchange for a one-time full payment of the debt balance.

Debt consolidation, on the other hand, is the taking of a single loan for the purpose of paying several smaller loans.

Debt Settlement

Debt Consolidation

Pros

Pros

- part of the debt is written off

- manageable payment terms

- instant financial relief to the debtor

- lower interest rates

- the debtor can immediately focus on rebuilding credit as well as managing credit better

- streamlined billing and payment schedule

Cons

Cons

- adverse effect to credit score is immediate

- timely payments may not have an impact on credit score rating

- written off portion of the loan is considered taxable income

As you can see from the above debt settlement vs debt consolidation comparison, one is entirely different from the other. Both of these strategies, when done properly, can help the debtor not only manage debt, but can also help them eliminate it, as well. Both have their own respective advantages and disadvantages. The best option will certainly depend on the needs and preferences of the debtor. Make sure that you have all the necessary information about these debt management programs and that you understand them well before you finally make your decision. An informed decision makes a big difference to your pursuit for financial freedom.

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