Distinguishing debt consolidation from other methods of debt relief

There can be many ways to mitigate the stress that arises from unmanageable debts. The choice is between debt settlement, debt consolidation and bankruptcy. You need to know what exactly these processes are so that you can choose one that not only fulfills the purpose without damaging your reputation and financial prospects. When confronted withthe financial processes, the common man is often challenged by the financial jargons that seem to be quite confusing. Above all, it becomes very difficult to distinguish between the processes of debt relief. In this article, we have tried to address the issue so that there is complete clarity between the processes.

Your options for debt relief

There are three different ways by which you can avail relief from debts.

• Debt settlement
• Debt consolidation
• Declaring bankruptcy

Each of these processes has been described in the subsequent paragraphs.

Debt settlement

In this process, the creditor negotiates with the lending company to make them agree to settle the debt for a sum that is lower that what is actually owed to them. This can be feasible only for unsecured loans like credit card loans and medical bills. Although you can take up the issue with debtors directly, the services of a debt settlement company will make it easier for you to get through. The debt settlement company has three goals to achieve –

• Make the creditors financial situation appear to be as much dismal as possible so that a case is built in favor of settling the debt.
• Create a fund that can be used for paying back the debtors.
• Negotiate with the debtors for the lowest amount of settlement.

This process works well when you are dealing with one debtor as too many debtors are difficult to handle.

Debt consolidation

Debt consolidation is the most widely accepted practice in seeking debt relief when you are finding it difficult to handle too many lenders simultaneously.  By availing the services of a debt consolidation company, you consolidate the total outstanding amount to take a fresh loan and then use the money to pay back all other debtors. This leaves you with just one big loan that you have to service and manage thus making it easy for you.

The process does not do away with the burden of loan but surely it gets reduced and becomes easy to handle. Taking the new loan at lower interest would give you some financial leverage to organize your finances better.

Bankruptcy

While in the above processes the creditor takes the initiative of making arrangements to pay back the debtors, when you declare bankruptcy, you make it clear that you cannot repay the loans and neither can you make arrangements for paying back. In this process, some of your assets are liquidated or sold off by a third party to pay back the loan. This is a legal process that is administered by legal professionals who deal with the lenders.

Debt consolidation is the safest process that can provide good scope to recoup your finances without damaging your financial prospects.