Debt Consolidation vs. Debt Settlement
Many consumers make the mistake of thinking that debt consolidation and debt settlement are the same thing. However, there are some distinct differences between these methods of handling your debts. Debt consolidation is the process of combining multiple debts into one monthly payment. Debt settlement helps you negotiate a settlement on your debts.
What’s the difference? On a debt consolidation program, such as FreedomQuest Debt Management Program, you will pay back the entire amount of your debts within a reasonable amount of time. A debt settlement program settles your debts at a reduced amount, anywhere from 20% to 75% of what you actually owe. However, there are some consequences to not paying the entire amount of your debt:
- Debt settlement damages your credit. Creditors won’t settle unless you’re severely behind in your payments. In a debt settlement program, you will generally stop paying your creditors and set aside an amount each month to be used to settle your debts until there are enough funds to settle your accounts with. In the meantime, your bills are falling behind and your credit is being damaged. Additionally, once you settle your debts, your credit report usually shows those debts as “settled” and because you didn’t pay back your debts in full, which can negatively affect your credit score for up to seven years. A debt consolidation program should not damage your credit rating. Many consumers find that they can qualify for a car or home loan after being on the FreedomQuest Debt Management Program for one year.
- Debt settlement may not stop collection efforts. With bankruptcy, your creditors have to stop collection efforts as soon as your file. That’s not the case with debt settlement. In most cases, your creditors will continue to try to collect on the money you owe. You may continue to receive collection letters and phone calls. A debt consolidation program works with your creditors, so once your creditors know that you’re on the FreedomQuest Debt Management Program your collection phone calls should stop.
- You could face litigation, liens and wage garnishment. Your creditors have the right to sue you for the amounts you owe. If they win, your creditors could put a lien against your home or car, and, in some states, garnish your wages. A debt consolidation program works with your creditors, so you’re not in danger of any harmful litigation while you’re on the program.
- Debt settlement companies charge expensive fees*. Most consumers will pay over half their debt settlement fees before any of their debts are settled. Besides service charges for managing your account, many debt settlement companies may charge a “debt savings” fee. A debt consolidation program only charges a small sign-up and monthly service charges.
- Debt settlement may be taxable. Whatever you don’t payback to the creditors is now considered income and may be taxable. In a debt consolidation program, you payback all your debts in a timely manner and don’t have to pay extra income taxes.
Before you sign-up for a debt settlement program call 1-800-320-9929. Discuss your financial situation with a certified credit counselor from Consolidated Credit Counseling Services. We will provide you a free debt consultation and advise you whether or not a debt consolidation or debt settlement would best fit your financial situation.
*Please note: Debt settlement costs do vary based on the company. You need to make sure that you understand all the costs involved before signing up for a debt settlement program.
