Written by Debtfree on March 8, 2018
Are you having trouble paying your medical and credit card bills? Don’t have enough income and savings to pay off your debts in a timely manner? Has your creditor turned over your account to debt collectors? If yes, then it’s high time you considered a debt relief program before your financial situation go from bad to worse and you have to declare bankruptcy.
The two debt relief programs that have been found to be most effective in eliminating unwanted and unmanageable debts are debt consolidation and debt settlement. Though both of the programs are effective but which is the best and right for you depends on your financial situation, needs and goals. These debt relief programs are designed to help debtors make their debt load lighter and much easier to manage.
Let’s take a deeper dive to understand these two debt relief programs, how they work and which one is right for you….
Debt Consolidation Program
As the name suggests, this debt relief program focuses on consolidating all your debts into a single loan. Debt consolidation leaves you with just 1 monthly payment instead of several; thereby making it easier for you, the debtor, to pay off your debt. The goal is of this program is to reduce your monthly payment and interest rate. Debt Consolidation program has no negative consequences on your credit.
The program uses 3rd party agency to combine multiple debts such as credit card bills and student loans and then converts them into a single repayment plan. The convenience and affordability of this program makes it a program of choice for many American credit card debtors. However, the downside of debt consolidation program is the fact you’ll be paying a long term on the consolidated loan so the lower interest rate can add up.
So, before you make your decision, it is wise to calculate and evaluate how much you’ll cut down in monthly payments through debt consolidation process. See whether or not it is worth the long term and additional interest? If you think it is worth it, then go for it. However, once the debt consolidation process gets underway, make sure that you continue to make payments on time without any delay to improve your credit health, score and creditworthiness.
Debt Settlement Program
In contrast, debt settlement program involves negotiating debt either directly with the creditor or through a debt settlement agency. The program aims to lower the total debt amount as much as 50 to 70 percent. Once the settlement is agreed upon, the remaining debt is waived off by the creditor for good. Now this program does sound better than consolidation at least at this point? 50 percent debt reduction is worth opting for this program but wait, it does come with a cost. Unlike consolidation, debt settlement affects your credit score. If you agree and opt for debt settlement, remember that it can damage and lower your hard earned credit score anywhere from 45 points to 125 points depending on your, the debtor’s, credit standing. So, let’s just say debt settlement is more like a ‘give and take’ process. You debt is immediately wiped off but your credit score suffers in the long run. Low credit score can hamper your creditworthiness and because of that, you may be unable to apply for unsecure loans in the future.
Also, you may only be eligible for this debt relief program, if you have a legitimate financial hardship. Your creditors will first take a look at your credit account history to assess your eligibility.
Steps to Follow to Choose Between Debt Consolidation and Settlement
Here are the steps you must follow to make an informed debt relief program selection decision:
1.Calculate Your Debt Amount
First get a copy of your credit report and check how much you owe to your creditors and what types of bills you need to pay off. In addition to this, check the status of your credit accounts too, on your report. This will help you know whether or not your accounts are charged off and turned over to collectors.
2.Estimate How Much Can You Pay Monthly
Calculate your liabilities and living expenses of each month and determine how much you can cut down and save on a monthly basis. This will help you determine the maximum monthly amount you can pay towards your bills each month. Based on the savings, you can then select between settlements or consolidation as the payments will differ in both cases.
3.Find Out Which Program You Qualify For
Remember if you have a low credit score, you may be unable to qualify for debt consolidation and similarly, if your debt amount is low and you don’t have any serious financial hardships, your request for settlement may be rejected. Therefore, it is important to first out which program you can qualify for. And for this reason, it is advisable to get professional help.
Get Professional Help to Make an Informed Decision
Both options debt consolidation and debt settlement programs have their own pros and cons. This can make the debt relief program selection decision extremely difficult. So, before you take action, it is advisable to get professional help. Hire a professional and an experienced debt consultant to help you in your selection. A debt consultant can provide you quality guidance and help you the make the right choice.