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Debt Consolidation/Debt Settlement

Debt Consolidation/Debt Settlement

By mjmackany

Debt Consolidation

Debt consolidation is usually the preferred way to go if you still have some assets to use as collateral. The objective is to take all of your short term debts i.e. credit cards, charge accounts, etc. and pay them off with a consolidation loan over a longer time period.
For example, many people use a second mortgage or home equity loan and spread the payment over 5 or ten years. Should you take this route, it is imperative that you do not use your cards to run up the debt again or you will be back in the same situation you were in before the consolidation.
Now you will have only one monthly payment that is much lower than your previous payments and usually at a much lower interest rate.
This is probably the best way to get out of debt and will not affect your credit rating significantly. If anything, it may tend to improve it!
Since the total amount owed will be approximately the same as before, over time the credit available will increase and so will your credit rating. As your income increases (hopefully) and your debt is reduced your credit rating improves. Make sure your debt consolidation payment is made on time each month and try to use debit cards or cash for purchases in the future.

Debt Settlement

Debt settlement is a method that is more frequently employed when a debtor has over $10,000 in unsecured debt. Here is how it usually works.
The debtor sends a letter to each creditor indicating that he or she is represented by a debt settlement company and all future correspondence should go to them. The debt settlement company usually supplies the letter for the debtor to sign, date and send to the creditor. The debtor stops making payments to the creditors and deposits a specific amount each month to a checking or savings account. Depending on the amount owed, the payment period is usually 24-36 months. The debt settlement company will charge a fee, usually 15% of the total debt and settle the debt for 20% of what you owe.
For example, lets say your debt is $20,000. The fee would be 15% 0r $3000. The expected payoff is 20% of $20,000 or $4000. Your total cost is $7000 spread over say 24 months ($291.67/mo) or 36 months ($194.44/mo.). The debtor will be debt free in 24 or 36 months and save 65%.
The advantage of debt settlement is that your monthly payment is much less than your previous payments to your creditors, i.e.50%-75%. Since the debt settlement company has been given legal authority, all calls and correspondence should be referred to them for settlement.
Now for the downside. Since you will not be making monthly payments on your debts, your credit score will suffer .However, it will not be as bad as filing bankruptcy.
It will take 6-12 months for your bank account to reach a sufficient amount for the debt settlement company to start settlement with your creditors for 20 cents on the dollar. In 24-36 months, your debts should be paid and they will obtain releases for you. You will be debt free assuming you havent incurred any new debts.
After reporting the debts paid to the credit bureaus, your credit score will start to improve. Hopefully, you kept at least one credit card out of debt settlement and kept it up to date with timely payments.
The final result will be a faster return to good credit without bankruptcy.