Debt Settlement vs Debt Consolidation
Which Is Better?

Debt settlement vs debt consolidation, choosing between the two is a question that has been pondered long and hard by just about anyone who has faced a severe debt reduction crisis.

All the misinformation floating around the web regarding debt help can make it very confusing and difficult for the average person to decide which approach for dealing with a debt crisis best suits their situation. Read on to eliminate some of the confusion and learn how to make an informed decision.

Debt settlement and debt consolidation each have their pros and cons. For any particular financial scenario one or the other may be the best choice, it is not a clear cut black-and-white analysis. Let's take a look at debt settlement first.

Debt Settlement: Pros and Cons

Debt settlement is the process by which you make an agreement with a creditor to pay less than the full balance of the debt and in return the debt is cancelled. This can have a large negative impact on your credit score and will be recorded on your credit report.

The obvious upside of debt settlement is the instant debt relief it provides, to say nothing of the reduction in financial stress you will experience. Once you pay the agreed upon sum to settle the debt, you no longer have to worry about paying a monthly payment to service it. But there a number of downsides to a debt settlement.

• There are will be tax implications, a debt settlement is considered income from a tax perspective.
• Obviously, your credit score will take a big hit, making future borrowing difficult and costly.
• You will generally have to come up with a significant lump sum in order to get your creditor to agree to the deal.
• With some creditors, settlement may only be offered in cases where the debt has exceeded a certain level.

Debt Consolidation: Pros and Cons

Debt consolidation is a process by which you combine a number of debts into a single debt that is serviced with one monthly payment. In theory, this may help to lower the amount of money you have to put toward servicing the debt each month and offer some monetary breathing room and financial stress relief.

One of the benefits here is obvious: since you will eventually pay your debts in full, the impact on your credit score is less severe than it would be should you decide to opt for a debt settlement. On the downside, in order to get a good interest rate on a consolidation loan, you will likely have to offer up some valuable property as collateral. Many consolidation loans are secured against the borrower’s home. Obvious, this adds an element of risk to the equation.

Debt Settlement vs Debt Consolidation—Making Your Decision

Debt consolidation may be a better option for you if you're simply looking to lower the total amount you pay to service debts every month. If you need to clear a debt in the short term and you are willing to suffer a hit to your credit score, debt settlement may be the better option.

Ultimately your decision should be based on how much income you can devote to servicing your debts, how much cash you can put together for any lump sum payment, and how important a good credit rating will be to your financial plans over the next five to ten years.