The Federal Trade Commission suggests debt settlement as an excellent solution for resolving unsecured debt such as credit cards. However, participation in a debt settlement program ruins credit for a while, as missed payments are necessary for debt settlement offers from credit card companies. Missed payments and other debt settlement activity usually makes it impossible to qualify for debt consolidation at the same time as settlement.
Comparisons
Debt settlement eliminates debts as the debtor pays off balances for less than the full amount owed. Savings of 20 to 70 percent are possible, according to SmartMoney. Debt consolidation combines several debts into one monthly payment. The Federal Trade Commission does not recommend debt consolidation as a sound strategy for debt management because there is no way to eliminate debt by borrowing more money. Also, the FTC explicitly warns against taking out home equity loans for debt consolidation because missing payments on the loan could lead to foreclosure.
Considerations
Some people in debt settlement may consider debt consolidation after becoming frustrated by the debt settlement process. Debt settlement requires individual negotiations with unsecured creditors, and there is no guarantee that any of them will agree to settlement, although most will. However, creditors will not discuss settlement until the account is past-due by two or three months. They have no reason to settle while accounts are paid as agreed. Better settlement offers with increased savings are possible as the card company considers listing the account as charged-off after about six months. Missing consecutive missed payments on a variety of accounts causes credit scores to plummet, making it impossible in most cases to qualify for debt consolidation.
Credit Reports
Debt settlement activity appears on credit reports in several ways. This allows potential creditors for debt consolidation loans to easily determine that the prospective borrower is having severe financial problems. The missed payments are listed on credit reports, along with charge-offs, collection accounts and debts that are settled. A charge-off is an account that is closed because of nonpayment. It is an internal accounting term and does not end responsibility for the debt. A collection account is an account that is charged off and sent to a debt collection agency. Settled debts are listed as "settled for less than the full amount owed." All of the statuses are considered very harmful to credit and would likely lead to a declined debt consolidation loan application.
Strategy
People opting for debt settlement are better doing it themselves, according to the FTC. The agency notes that many consumers complain that for-profit debt settlement firms fail to perform as promised while offering poor customer service. Some credit card companies refuse to negotiate with for-profit firms, and lawsuits are possible for credit card debts that are charged off. Although debt consolidation is not a perfect solution, some people are better off considering that option first and then debt settlement if they are unable to gain approval or consolidate all of their debts.
0 comments:
Post a Comment