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Debt Consolidation vs Debt Settlement

When should you choose debt consolidation over debt settlement or visa versa? It all comes down to your particular financial situation. Both are meant to relieve and lower your monthly payments and even pay off the debt in a shorter time period. But that's where the similarities end.

Debt consolidation requires obtaining a loan of some type. The money can be used to consolidate and pay off almost any type of secure or unsecure debt. To obtain most debt consolidation loans though, you will need good credit and probably collateral. This can be an issue if you lack the equity in your home or if you have poor credit. But if you qualify, you'll typically be debt free in just 3-5 years compared to over 25-30 years it would take by paying just the minimum payments on those credit cards.

Debt Settlement on the other hand is a good fit if you have less than stellar credit or lack the collateral to secure a debt consolidation loan. It is effective in paying off only unsecure debt such as credit cards, medical bills, and collection accounts. It is NOT a solution for secured loans such as auto loans, home loans, student loans, or taxes. To put it simply, debt settlement is a viable option if you see no light at the end of the tunnel, and are contemplating filing Chapter 7. How it works is that a debt settlement agency negotiates down your unsecure debt by as much as 45-60%. They do this by settling your debt in bulk, with thousands of dollars of multiple consumer accounts just like yours all at one time. This enhances the leverage needed to negotiate with your creditors.

In debt settlement you are set up with monthly payments that are typically half of what your minimum payments are right now. Plus, you'll settle your debt in usually just 2-3 years! One negative of debt settlement is your creditor will report your account as late to the credit bureau until the account is settled. Once the account is settled and paid, the creditor will report the account as "paid" or "settled" to the credit bureau. In many instances, the debt settlement agency will even negotiate with the creditor to erase any derogatory marks while you were in the program. Either way, you'll probably see this as an improved option over filing bankruptcy which stays on your credit report for ten years!