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What’s the Difference Between Debt Consolidation and Debt Settlement?
If you’re struggling with debt, you’re not alone. Total household debt shot up to $17.80 trillion as of the second quarter of 2024. So how do you deal with overwhelming debt? We’ll compare two of the most common strategies: debt consolidation vs. debt settlement. Understanding the steps, pros and cons of each can help you make an informed decision about which process best suits your financial goals.
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With debt settlement, you negotiate with creditors to reduce how much you owe. A third party, such as a debt settlement company, also can negotiate for you. If the creditor accepts the debt settlement plan, your remaining debt is forgiven, and they can’t collect on it.
Here’s how debt settlement works and the process involved:
Debt consolidation involves combining multiple debts into a new loan or credit card. This allows you to roll your debts into one loan that may have lower interest rates than your original debts.
Here’s how debt consolidation works and the process involved:
Though they both can potentially ease the burden of debt, there are key differences when you compare debt consolidation vs. debt settlement. Let’s review a detailed comparison of the process, impact on credit score, cost and the time required.
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Considering pursuing debt settlement? Review the pros and cons first.
Pros:
Cons:
So, is debt settlement right for you? It might be if you’re facing a large amount of debt and can’t make minimum payments. You can reduce your overall debt burden and get relief from creditors if it’s successful. Just know your credit will take a hit, and there are tax implications to consider.
Thinking debt consolidation might be a better fit for your needs? Check out the advantages and disadvantages of taking this route.
Pros:
Cons:
Debt consolidation may be a good option if you want to simplify your payments and get a lower interest rate. You’ll still owe the full amount, but if you get a lower interest rate, you’ll pay less interest over time and simplify your debt.
As you look at debt consolidation vs. debt settlement, start by assessing your financial situation. Your total debt, income and expenses can help you determine whether debt settlement or debt consolidation is a better option. Consider whether you can manage a single monthly payment or need a major reduction in debt.
Don’t forget about the impact on your credit and any long-term financial or tax implication. Finally, it’s worth it to seek out the professional opinion of a financial advisor or credit counselor to determine the best path forward.
Maybe you’re scrambling after your car broke down. Or you got a medical bill you weren’t expecting. Or inflation has finally pushed your budget over the edge. Take a breath. You don’t need to go it alone.
When money is tight, these resources can help you manage unexpected expenses without stress.
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