Debt settlement offers the ability to eliminate your unsecured debt.  Consolidation loans will consolidate debt, which will lower the interest and monthly payments, but with debt consolidation no debt is forgiven.  However, both debt solutions will have various consequences on your credit score and future financial options. Before choosing either debt relief solution, get educated and consider the benefits and risks before choosing.

The Benefits Of a Debt Settlement Solution

Debt settlement is a relatively new debt relief program.  A debt relief company will work on your behalf to negotiate a reduced pay-off to your credit card companies. You don’t get instant relief with debt settlement, but after 12-24 months you will likely be out of debt.  This is a great alternative to people that do not want file a bankruptcy and do not have the ability to qualify for a debt consolidation loan.  The biggest benefit with debt negotiation is that you will pay less than you owe on your debt.

The Risks Of Debt Settlement

There are a few risks and concerns with debt settlement. The most significant one is the immediate effect on your credit score. Debt settlement is viewed by creditors like a charge-off.  In most cases your credit scores will drop in 500 range, at least while you are in the debt settlement program. And while you can improve  your score, for the next two years you will have to work with bad credit lenders. You could also have to deal with the tax implication of a write off. The IRS sees debt settlement like receiving a cash gift or income.  Depending on where you live, you may also have to pay additional state taxes.

The Benefits Of Debt Consolidation

Debt consolidation can also provide payment relief. With a debt consolidation loan, you are extended a set amount of money that is used to refinance credit card debt.  Another benefit is that instead of paying 6 different credit card bills, you only have one monthly payment to goes the lender.  In most cases, a debt consolidation loan will not have a negative impact on your credit score. In fact in some cases a second mortgage can help you raise your credit scores.

Some Concerns Of Debt Consolidation
The main concern consumers have with debt consolidation is the fact that they will be paying back the entire balance of debt, whereas with debt settlement you only pay back the negotiated amount.

I have a handful of credit cards that total about $23,000 in credit card debt.  Until recently, I have always paid my bills on time. Just recently, I received a letter from a debt relief company. I placed a phone call to them and they said I likely qualify for a “debt settlement program,” but I wasn’t sure if this was a good solution for my debt or a scam. I’m not sure if this kind of debt relief is in my best interest. I own a home, but I do not have any equity in my home to use for debt consolidation.  What is your financial advice for eliminating my credit card debt?   Thank you. — Tina

Response: Dear Tina,

Thanks for your letter regarding debt settlement. I want you to understand that there are many options for confronting debt and that the best solution depends on your needs and goals. Debt settlement is becoming a popular form of from debt relief!  Carrying that much credit card debt in a tight credit and job market can lead to additional financial pitfalls, so you need to take control of your finances quickly.  Since you have no equity, you can would be unable to use your home as collateral for consolidating credit card debt with a debt consolidation loan or mortgage refinancing.

What appeals to most consumers about debt settlement is that they can eliminate their debt faster and actually pay back less than what is owed. Unfortunately, the there have been some shady of debt settlement companies promise financial solutions that they do not deliver.  According to the Federal Trade Commission, these companies either go out of business or run a scam for the consumer’s money.  A good debt settlement will help you escape credit card debt quicker and will outline a plan for you to be debt free within a year or two.  Finding a debt settlement company with a good record is vital.  You need to have peace of mind each month that you are working with a trusted company for debt relief.

Does debt settlement affect your credit negatively?�
Yes in most cases debt settlement will temporarily hinder your credit scores during the months you are building your account for the debt negotiations.  Consumer credit counseling and bankruptcy will also harm your credit, but typically consumers can repair their credit quicker with debt settlement.

As soon as you have the ability, I recommend starting a savings plan. Saving even a little bit each pay-period enables you to stop using your credit cards for the unexpected expenses that can arise frequently. Saving is essential to grow your wealth and prevent consumer debt. Check with your bank to set up an automatic transfer to savings via payroll deduction or direct deposit.

1. Compare several debt relief companies online (search using keywords like: debt loan, debt management, debt negotiation, debt relief company, debt consolidation and debt settlement.)

2. Read company reviews by the consumers that have completed their debt relief programs. Consider their testimonials and the disputes carefully.

3. How long the company has been in business, its achievement and credibility in successfully negotiating debt settlement, its membership with TASC

4. Check if the debt settlement company is accredited with the Better Business Bureau or listed in the Chamber of Commerce.

5. Once you have sorted all trusted debt relief firms, go through and compare the terms and conditions. If you have a query, do not hesitate to ask, and get everything in written. Once you are comfortable with the terms and conditions and find the program reliable, go for it and follow the debt relief program that is typically for six to nine months and helps you eliminate your unsecured debt in less than two years.

Contact Jeff Morris at 866-945-6263 for a free debt relief evaluation.