Difference between debt settlement and debt consolidation

Anyone dealing with insurmountable debt may look for solutions that lead to a better financial situation. Advertisements in Louisiana media could suggest debt settlement and debt consolidation plans, and people often confuse the two. Drastic differences exist between settling and consolidating debt, and neither option may be viable for someone who could be better served to explore bankruptcy protection.

Debt consolidation vs. debt settlement

Debt consolidation involves using a loan to combine debts from different creditors. Someone who owes $5,000 to six other credit card companies may take a home equity loan for $30,000 to pay off the credit cards. The home equity loan means one monthly payment and, likely, much lower interest rates.

Those who don’t own a home or lack equity might opt for a personal or secured loan. Unfortunately, not everyone qualifies for such loans, but they could explore a debt consolidation service’s options.

Debt settlement deals involve making an offer on debt that the debtor cannot repay. For example, a person buried under debt might miss several payments on a maxed-out credit card. The debtor could offer a 50% lump-sum payment or make several monthly payments to cover the 50% settlement offer.

Bankruptcy as an option

Filing for bankruptcy might be the better option for someone unable to manage debt. There’s no guarantee that the debtor could pay the new loan with debt consolidation deals. And they could start running up balances on their credit cards once again, leading to more debt.

Debt settlement offers could ruin a credit rating and leave someone with tax debt. The forgiven settled amount may result in a 1099 filed with the IRS, creating a tax bill.

Chapter 7 or Chapter 13 bankruptcy would stop collection action and involve discharging some or all unsecured debt. For some, bankruptcy could be the better strategy.