Difference between Debt Consolidation and Debt Settlement

Debt Consolidation

Debt consolidation is defined as a form of debt relief, and it combines multiple debts into a single new consolidated debt. The idea is that instead of owing money to many creditors and having a ton of monthly payments to deal with, debt consolidation allows you to reorganise those debts into one single combined total. Some of the most common ways to do so involve credit cards with zero balance transfer along with debt consolidation loans along with personal loans from credit unions or banks. With the help of debt consolidation, the old debt of an individual or institution will get paid off by way of new loans.

For example, if a person currently owes a total amount of Rs. 15000 through four different credit cards, they can avail of a personal loan for that amount and use it to pay off the total balances of those credit cards. Although they will still owe Rs. 15000, at least the debt will be all in one place with one monthly payment, and possibly at a lower interest rate. When a debt consolidation loan is present with a lower interest rate, you can pay off the debt sooner and with a lower total cost. It is important to know that the amount owed to the creditors will still be the same even if an individual or organisation chooses to opt for debt consolidation. The main aim of debt consolidation is to offer a greater amount of visibility and control over the debt of a party, and combining all the debts into a single part will provide a greater incentive to clear the existing debts.

Debt Settlement

Debt settlement is defined as a form of debt forgiveness wherein the creditors can allow the debtor to pay a part of the amount that they actually owe. It is sometimes compared with debt consolidation, but there are a number of differences between the two. Unlike a debt consolidation where an individual or entity may ultimately pay off their entire balance of debt, the debt settlement helps the debtor get a reprieve from their creditors in terms of a part of the loan repayment amount.

Debt settlement can be risky and is generally considered an option of last resort. If you have exhausted all the other options, then debt settlement does seem like the right financial instrument. Even then, a number of experts advise exploring different options. Indeed, it is important to know the risks. Debt settlement involves the process whereif you are delinquent on your bills then you can make an agreement with the creditors after a certain period of time to repay a percentage of the total amount that you had owed them. It can also damage your credit score while appearing on your credit reports for several years. There is no guarantee that the creditors will also agree to settle the debts. Instead, they may also choose to sue you for repayment. If you can succeed in having any of your debts forgiven, that amount then becomes the taxable income which gets reported to income tax authorities, wherein you will have to pay the taxes on the amount which is forgiven. There are also a number of debt settlement companies that will offer to negotiate on your behalf with your creditors in exchange for a fee. As part of this process, these settlement companies will also ask you to make the payments into a separate account that they will set up for you. This cash amount is then used to clear your settled debt portion after negotiations with the creditors.

Difference between Debt Consolidation and Debt Settlement

Both debt consolidation and debt settlement are important tools in financial management. They help companies manage their short term as well as long term debt in a prudent manner. However, it must be noted that there are some major areas of difference between debt consolidation and debt settlement, and we must focus on those points below to get a better idea of the topic:

Debt Consolidation

Debt Settlement

Definition

Debt consolidation is defined as a form of debt relief, and it combines multiple debts into a single new consolidated debt.

Debt settlement is defined as a form of debt forgiveness wherein the creditors allow the debtor to pay a part of the amount that they actually owe.

Working

It mainly aims to reduce the total number of creditors that you have to pay by combining the debts into a single new loan.

It mainly aims to lower the total amount of debt you owe. As a form of debt forgiveness, you or a company negotiate with creditors to reduce your debt obligation.

Credit Score

It may end up causing a slight dip in your credit score at first, but it later helps to improve this figure in the long term by reducing your credit utilisation ratio.

It may end up causing a significant hit to the credit score, as it typically requires the person to go into delinquency on their debts.

Conclusion

There are many areas of difference between debt consolidation and debt settlement. But both of them have an important role in financial markets. These instruments are of great value in the development and growth of the economy of our country.

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