Resolving debt is something that nearly everybody must do at least once or twice in their lifetime. Debt collectors can be tricky, and once they get their claws into your personal finances, they can drive you to bankruptcy, ruin your credit, or worse – milk you for all your cash or possessions.
The best thing to do is to take charge of your debt resolution process before the debt collectors come for you. You can pursue debt consolidation or debt settlement. But what do these options mean, and which is best for your situation?
Debt consolidation
Debt consolidation is a money trouble relief process in which several debts are combined to form one big new debt. Debt consolidation can be done using a personal loan, an equity loan on your home, a 401(k) loan, or a balance-transfer credit card.
The greatest benefit of debt consolidation is that it reduces the number of payments that you have to be concerned about. Instead of having three, or five, or seven payments on different days of the month, you will have one single payment that recurs on the same day each month. This can create immense peace of mind.
Debt consolidation often results in a lower interest rate which would enable you to save money in the long run and pay your debt off sooner. Consolidation works best for debts that are already a manageable amount.
Debt settlement
Debt settlement is a lot riskier than debt consolidation, but many might find the risk attractive. When trying to settle your debt, you stop paying on your debts altogether for a time. Then, once your account has been in delinquency for a while, you will attempt to negotiate a settlement with your creditors.
If the settlement talks go well, you will be able to pay off your entire debt for a much lower amount. Creditors and debt collectors are often willing to work with you if you can pay a huge sum at one time because their attempts to collect the debt cost them time and money.
The danger of debt settlement is threefold:
- By not paying on your debts regularly, your credit score will be essentially ruined. (This may be okay with you if you don’t depend on credit for everyday living expenses.)
- When creditors see that you are not paying on your debts regularly, they may choose to sue you for payment, which is a whole other headache.
- There is no guarantee that your creditors will choose to negotiate a settlement with you. They may, in fact, crack down harder if they see that you are deliberately refusing to pay for an extended period of time. It all depends on how hungry they are to wipe your debt off of their hands.
Debt consolidation or debt settlement – how to choose?
Whether you choose consolidation or settlement all depends on the amount of risk you are willing to take with your financial future. If you depend on your credit card(s) and have a lot of expenses, debt consolidation appears to be the better option. However, if you don’t depend on credit cards for day-to-day expenses and you are relatively financially secure, you may be inclined to take on the risk of pursuing debt settlement.
