Debt Consolidation vs. Debt Settlement

A debt consolidation loan allows you to combine multiple debts into a single loan, usually with a single, fixed monthly payment.  By signing a standard promissory note with a bank or other lending agency, you receive loan proceeds that will be sufficient to pay the debts that you wish to consolidate in full.  You then will make payments toward the consolidated debt loan, typically on a monthly basis, for a specified period of time. 

Advantages of Debt Consolidation Programs

One of the biggest advantages of a debt consolidation program is that it can substantially lower your monthly debt payments, which can bring a great deal of relief for a person who is burdened by high debt.  Another potential advantage of debt consolidation programs is that your consolidation loan may have a lower, fixed, interest rate, as opposed to multiple higher interest rates that might fluctuate over time, such as if you owed several credit card debts. 

Disadvantages of Debt Consolidation Programs

By lowering your monthly payments through a debt consolidation loan, you will almost certainly lengthen your payment term.  In other words, it may take longer to pay off your consolidation loan than your original debts.  As a result, you will end up paying more interest on your loan.  Furthermore, debt consolidation loans may result in a higher interest rate than you were paying on your original debts, at least in some cases. 

Advantages of Debt Settlement Programs

On the other hand, debt settlement programs are quite different than debt consolidation programs.  A debt settlement agency works with you and your creditors in order to negotiate a settled-upon amount or arrangement for paying your debt.  In most cases, if the debt settlement agency is successful, you will end up paying less than what you originally owed on your debt.  Plus, you will have fewer bills to pay, and will not have to worry about increased interest rates and paying off long-term debt.

Disadvantages of Debt Settlement Programs

Nonetheless, debt settlement programs have their disadvantages, as well.  Creditors are in no way required to accept a creditor debt settlement, or even negotiate with a debt settlement agency.  Therefore, if your creditors will not agree to a settlement of your debt, there is nothing you can do about it.  Plus, you will have to first default on your debt, which will have a negative affect on your debt settlement credit report, and can result in legal action by the creditor.  Default on a debt can result in increased interest rates, penalties, late fees, a refusal to extend you further credit, as well as being sued to collect the debt.

Contact an Attorney Before Choosing Between Debt Consolidation and Debt Settlement

If you are still unsure as to whether a debt consolidation program or a debt settlement program is right for you and your financial situation, take care to contact an attorney for legal advice.  In doing so, you can ensure that you understand the advantages and disadvantages of each program, and make the choice that is best for you.