Debt Settlement and Debt Consolidation - Essential FAQs for a Better Understanding

According to a Federal Reserve statistic quoted by https://www.forbes.com, the total revolving debt is now at $1.04 trillion and over the last 12 months, the total interest and fees paid on credit cards were over $104 billion. As can be well imaginedmanycardholders are caught in a severe debt trap and constantly looking for ways to improve their financial standing and become debt free. While there a quite a few ways of debt relief, debt settlement and debt consolidation are among the most popular as they are widely marketed solutions by innumerable private companies. However, the mechanics of the two methods are not widely understood as a result of which, people in financial distress tend to complicate their lives further by making inappropriate choices. Some essential FAQs that should bring about a better clarity on these two common debt relief options:

Common Question about Debt Settlement

What Is Debt Settlement?

Debt settlement is a process by which you or your representative negotiates with creditors to settle the dues for less than the actual amount that you owe. The reason why debt is settled by the credit card companies is that they are afraid that in case you file for bankruptcy, they would lose everything; settlement gives them an opportunity to get a substantial portion back.

On What Does The Success of Debt Settlement Depend?

Debt settlement works if the credit cardholder can convince the card issuer of his genuine financial hardship such as loss of employment, unexpected illness of a family member, death, or divorce of a spouse, etc. Further, the cardholder must show that he is genuinely interested in paying back as much as possible but if refused, he would have no other choice but to file for bankruptcy.

Why Should You Consider Debt Settlement?

By negotiating a settlement, you will be able to save a lot of money and hence you can become debt-free far more quickly than by any other method. By negotiating your debt settlement, you can avoid being harassed by debt collectors and even being sued by the creditor or a collection agency. It also represents a relatively guilt-free alternative to declaring bankruptcy because you are genuinely attempting to pay your creditors as much as you can.

What Are the Disadvantages of Debt Settlement?

When you have stopped making any further payments to the card company, the total dues tend to mount up due to the application of interest and penalties. The missed payments not only hurt your credit score but also the total savings from the settlement are reduced substantially due to the extra interest and penal fees. Debt settlement can be a long and arduous process calling for good negotiation and communication skills. During this period, you are likely to keep on facing debt collection calls or even be sued by the creditor. If you do manage to get your debt settled, you have to remember that any amount in excess of $600 is liable to tax.

Is It Possible To Settle Debt by Yourself?

Most certainly, you can settle debts by yourself, however, you will need to be highly organized and determined to achieve success when you are faced with the legal might of a credit card company. You should be able to put together a convincing and true story of why your finances are in such bad shape and explain why you think you have no other alternative than bankruptcy.

What Is the Benefit of Using a Debt Settlement Company?

The main benefit of engaging a professional debt settlement company even though you will have to pay fees is that they are aware of how the card companies negotiate a debt settlement. You can find out the extent of savings customers can get by reading up on the debt settlement reviews online.

Common Question about Debt Consolidation

What Exactly Is Loan Consolidation?

Loan consolidation is the technique of aggregating all your credit card or personal loans to find out the value of the debt and then taking out a new loan with which, these individual debts can be paid back in full. By engaging in loan consolidation, you end up with one large loan instead of multiple smaller loans. The total value of your loan amount does not increase or decrease.

What Are the Most Common Ways of Consolidating Loans?

If you are considering only credit card balances, it can be very effective to consolidate them using a zero-percent balance transfer offer. You can also take out a debt consolidation loan from a private lender or a bank or even use a home equity line of credit.

What Is the Benefit of a Loan Consolidation?

The main advantage of availing of a balance transfer offer is that you can save on the interest expense, as you will typically get an interest-free period of 15-18 months. When you consider that the average APR of credit cards is a whopping 15.5%, the saving on the interest can indeed be quite substantial. In case of a loan from a private lender, the rate of interest that you will be charged is a function of your credit score and past relationships. A home equity line of credit is the cheapest method if you have substantial equity in your home but you can end up risking your home in case you default on the repayment. You can also use this opportunity to make the monthly repayment amount more affordable by extending the loan period.

Are There Any Risks of Debt Consolidation?

Apart from the initial hit on your credit score when you take the debt consolidation loan or a new credit card for the balance transfer, there are no obvious risks associated with debt consolidation. With the credit cards becoming free of dues and you making regular repayment on the consolidation loan, your credit score will, in fact, gradually improve. The real danger is that you will start swiping your credit cards again carelessly and end up in the same debt-trap as before.

Conclusion

Both debt settlement and debt consolidation are effective methods of debt relief. You should try debt consolidation first and try to manage your debt by making lifestyle changes and saving more. If the amount of debt is so large that the only way out is bankruptcy, you should attempt to resolve things by settling debt as a last resort.