What makes debt settlement different from debt consolidation loan?

debt settlement

When we talk about debt, a Persian proverb comes into my mind.  I am so impressed by that proverb that I am forced to use that proverb here. The proverb says “There are four things every person has more than they know- sins, debts, years and foes.”  Quite true.  Every person in this world has his/her life, but one thing is common in all the persons are debt.  Each and every person commits some sort of debt in his entire life.  Even without knowing, your debt piles up like a mountain. Some succeed in repaying it while others fail to repay.  The relationship between a debtor and creditor becomes so strong that your shadow may leave you but your creditor is always with you as long as you repay the debt amount.  Sound interesting. Isn’t?

Well, managing debt is a talent, and not all can do it perfectly.  If by chance you have a doubt whether debt settlement is different from debt consolidation loan, then you are right.  Debt settlement is definitely different from debt consolidation loan.  Even though both are the tools of debt management, each of the tools is used in a different situation.

Debt consolidation loan is a loan which is equal to the accumulation of debts from different creditors. By taking this new loan, all the old debts can be cleared. On the other hand, debt settlement option is used when you are unable to clear your debts.  In other words, debt consolidation loan refers to a new loan to clear old debts, and debt settlement refers to negotiating your existing debts.

Apart from the creditor, even debt settler is the common factor in both the cases. Both the cases can be handled better by a debt settler.  In case of debt consolidation loan, the debt settler helps you in consolidating your debts.  He also helps you in getting a suitable loan amount and advises you in clearing your old debts.  Of course, he will charge you for his services. On the other debt, settler works work efficiently in case of debt settlement cases. He works on your behalf and tries to negotiate with your creditors.  Having an excellent experience in this sort of work, the success rate in negotiation is high.  Also, you must go through debt settlement feedback before you get in touch with any company.

Let us now discuss what exactly is done in debt settlement and debt consolidation loan.

In debt settlement, a negotiation is done with a single creditor or group of creditors to waive off the debt.  The negotiation may be in terms of relaxation of time to repay the due amount or waive off the due amount either partial or whole amount. In debt consolidation loan, various debts taken from creditors are summed up, and an equal amount is taken as a new loan to clear off all small debts.  For instance, if you have debts like $ 5000; $40000; and $55000, then debt consolidation loan to be taken will be $100000, provided you get it.

In case of debt settlement, you can make negotiations with the creditor regarding relaxing the due amount and reducing the due amount to less than $ 100000.  Even if the time is relaxed, it is beneficial for you as you get sufficient time to arrange the funds.  However, it is very difficult to convince the creditor and negotiate the new terms of payment.  When the debt amount is small, they can be consolidated, but they cannot be negotiated with the creditor for waiver off.  Debt settlement option works out only in case of significant amounts.

But approaching a good and experienced debt settler will solve the problems.  However, it depends on individuals to control their unnecessary expenses and manage their available funds.  Especially in case of debt consolidation loan, you have to plan to repay it successfully, because if you fail, then the lender may not entertain you the next time and may mark you as bad debt payer. This remark will create a negative impact on your image, and no one else will entertain you in case of need.

Any aspect with good has bad effect also.  There are many drawbacks of approaching the debt settler in debt settlement and debt consolidation loan.  Some of them are:

  1. Fees: Normally, debt settler charges normal fees towards their service charges. But as you are already in a deep trouble, even normal fees will be additional burden on you.  In both the case, this is same case.
  2. Time relaxation: When you get time relaxation to pay the due amount, if you utilize it properly, then the whole purpose is solved. But in case you misuse, then the whole exercise will be a waste.  And next time you approach the creditor he will not at all entertain you.  So you need to mend your ways and manage your debts properly without creating problems for yourself.
  3. Taxes: In case of debt settlement, in case your debt amount is waived off to some extent, the tax personnel may consider this waived off amount as your income and charges on it. Even though you are effacing practical problem of no funds, the tax personnel won’t consider your situation. For them any waiver off is an indirect income.
  4. Rejecting your proposal: The creditor has full rights to reject your proposal in both the cases. Sometimes approaching the creditor may be fruitful if it is done by you.  The creditor may be impressed by the way you communicate rather than your debt settler, because sometimes, the debt settler may behave rudely and this behavior will automatically irritate the creditors.  In case of debt consolidation loan, if debt settler is approached, maybe some expenses which you can clear off easily may also be clubbed in the entire debt list by the debt settler.  So, here your viewpoint of expenses and debt settler’s viewpoint does not match.  So things which can be handled easily will be messed up unnecessarily if the complete details are not given to the debt settler properly.

If you wish to know anything more about debt settlement and debt consolidation loan, then you can go ahead and check out the other blogs.


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