Debt consolidation and debt settlement are options for people drowning in unsecured debt. Whether to roll debt into one big loan or settle with creditors and lower amounts owed is a financial decision that requires thoughtful consideration and careful research. It's important to understand how both options work and what the pros and cons are before trusting a credit repairman and signing on the dotted line.
Qualifications
Before individuals decide to consolidate or settle their debts, they should get a copy of their credit report, make a list of all unsecured debts, contact legitimate companies and find out whether they qualify for debt consolidation. To qualify for a consolidation loan, a person must own his home and have enough equity to use as collateral, have a minimum FICO score and a steady job that meets minimum monthly requirements. To qualify for debt settlement, a person typically must be at least $7,500 in debt.
Advantages
Debt consolidation lowers monthly payments by rolling all unsecured debt into one loan, and can be paid in full in as little as three to five years. Lower interest rates create long-term savings, interest can be deducted at tax time, and debts are noted on credit reports as paid in full. Debt settlement programs work directly with creditors to decrease the amount of debt from 40 percent to 80 percent, and debt can be paid off in as little as two to three years.
Disadvantages
A debt consolidation loan becomes a secured loan. A person could lose his house if he defaults, and his credit score could temporarily suffer. Debt settlement can impair a person's credit rating for a longer time. Creditors can sue consumers for unpaid debt and collection agencies could continue to harass consumers long after a debt is settled. People might also owe taxes for settled debt over $600.
Considerations
Debt consolidation is a home equity loan, so mortgage payments will be higher but the principal amount owed on unsecured debt stays the same. Debt settlement triggers the IRS to look at canceled consumer debt as a potential tax obligation. An insolvency rule applies, however, that states if a person's liabilities are more than his assets, he is considered insolvent and no taxes will be owed.
Warnings
Debt consolidation companies can charge high fees to manage loans and interest rates can be exorbitant, costing a consumer more than he bargained for. Debt settlement can show up on a person's credit report for up to seven years and make it hard to get another loan. Debt settlement and consolidation companies should be checked with the Better Business Bureau for scams and complaints as most don't live up to promises and many people find themselves in more trouble than it's worth.
0 comments:
Post a Comment