Debt Settlement vs. Debt Consolidation - Which Option is Better?

Both debt settlement and debt consolidation can reduce and eliminate your debt. But each will have different consequences on your credit score and future financial options. Before choosing either option, educate yourself on the pros and cons of each.

Debt settlement means that part of your debt is immediately wiped out by your creditor. You will find instant financial relief in your monthly budget. And the rest of your debt payments are much more manageable.

You will also find that you can start rebuilding your credit from this point on. Instead of juggling late payments, high debt loads, and other factors, you can focus on managing your credit better.

There are a few downside to debt settlement. The biggest one is the immediate affect on your credit score. Debt settlement is seen much like a foreclosure; your score will be 500 or lower. And while you can improve your score, for the next two years you will have to work with sub prime lenders.

You will also have to deal with the tax implication of a write off. The IRS sees debt settlement like receiving a cash gift or income. Depending on where you live, you may also have to pay additional state taxes.

Debt consolidation can also help you get out of debt. With consolidation, a company negotiates lower rates with your creditors. You make one monthly payment to the debt consolidation company, and they handle paying all your accounts.

They also deal with any paperwork hassles, canceling fees, and closing accounts. Usually, you can be out of short term debt in five years or less.

Debt consolidation will have less of an impact on your credit score. Most lenders will temporarily put a hold on extending you more credit until they see you are making regular payments. You need to still monitor your accounts to be sure the debt consolidation company is making on time payments.

There is no perfect solution for getting out of debt. Debt settlement can help you see an instant improvement in your finances, but at the cost of your credit score. Debt consolidation simplifies the process with minimum affect on your credit, however it does take time.

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