Finding yourself mired in impossibly unmanageable debt may convince you to seek a solution fast. Two options available to you are debt consolidation and debt settlement. Knowing which is best for you can mean the difference between finding a resolution to your financial problems and getting deeper in debt.
Debt Consolidation
Consolidating your debts means taking the majority of your large debts and paying them off with one new loan. The main purpose is to reduce your total payments by having one lower-interest loan, instead of many high interest rate loans. This can be accomplished by placing your debt on a low-interest credit card; applying for an equity, or second, loan secured by your house; taking a personal loan from your bank; or hiring a debt consolidation service. If you do the latter, you will give the service a check each month and they will pay your loan bills for you. However, ask what the fees and interest rate are before you sign a contract for a debt consolidation service. You may find when you take this approach that you're not saving money at all.
Debt Settlement
Settling your debt requires you to contact your creditors and ask if they will take a lump sum payment that is less than what you owe. You must have access to the amount agreed upon, so you can pay it off immediately. If you are not able to negotiate with your creditors, you can hire a debt settlement company to do it for you. These companies can charge high fees for something that you may be able to accomplish alone. It's important that your creditor send you a letter that outlines the amount settled upon and that the rest will be forgiven so that collection agencies do not continue calling and so the debt is removed from your credit history. Ask for a settlement amount of about 30 to 70 percent of what you owe. Depending on your situation, the creditors may feel that receiving something from you is better than nothing at all.
Considerations
You may be able to settle and consolidate your debts. Once you negotiate with your creditors to lower your balances, you can pay them off with a low-interest loan that consolidates your debts and allows you to pay off the lower amount settled. If you are able to control your finances with a consolidation loan, your credit score won't be affected as much as a debt settlement. Taking out a new loan may negatively impact your credit score approximately eight to 15 points. However, a debt settlement agreement can bring your score down by 45 to 125 points, depending on what it was beforehand.
Alternatives
Paying excessive fees to debt settlement and consolidation companies doesn't help when you don't have enough money to pay your bills in the first place. Before you hire such a company, visit a reputable nonprofit credit counseling service. Your financial history will be reviewed and the counselor will give you options that are best for your situation. Look for a credit counselor who belongs to a trade association, such as the National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies. If you are unable to work out a plan to pay your creditors, filing bankruptcy is an alternative. This will give you relief from collection activities and, depending on the type that you file, you may be able to keep some or all of your assets.
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