Feeling completely overwhelmed by debt? When speaking to a debt attorney about debt resolution, they will likely bring up the options of settlement and consolidation. Although some might confuse the two, they are completely different processes with their own set of pros and cons, and will vary depending on the circumstances.
In this blog, we will outline the differences between debt resolution and consolidation in Texas, so you can determine which is right for your situation. Before you make any decisions, contact the Heston Law Firm for professional advice.
What is Debt Settlement?
Debt settlement is the process in which a debtor, often with the help of a debt attorney, negotiates with creditors to pay a reduced amount of their debt. This is typically done in exchange for a lump sum payment instead of ongoing monthly payments.
The process begins with assessing your financial situation and determining how much you can realistically spend on a lump sum. Keep in mind that most creditors will settle for 40-60% of the total sum. The next step is to contact the creditors and negotiate your terms with help from a debt attorney. Once an agreement is reached, you will make the payment.
What is Debt Consolidation?
Debt consolidation typically involves combining multiple debts into a single loan with one monthly payment. This can simplify financial management and potentially lower overall interest payments if a lower-interest loan is obtained.
Debt consolidation begins the same way as debt settlement, with assessing your financial situation and determining which debts you want to consolidate. Next, you will choose a consolidation method. Some common methods include:
- Balance Transfer Credit Card: A credit card that allows you to move balances from high-interest cards to a new card. This is a great option for those with excellent credit scores.
- Home Equity Loan: Gives you a lump sum of money at a fixed rate, but will also add another monthly payment to your plate.
- Debt Consolidation: Use a portion of the loan’s proceeds to pay off the money you want to consolidate. This type of loan can help you avoid the high interest rates that come with bad credit personal loans.
- Peer to Peer: Borrowers pair up with investors for funding. These loans are unsecured, so credit history is important.
Once you select an option, the final step is to pay off your debt! Debt consolidation can simplify repayment and potentially lower your interest rate, so take that into account when making a choice.
Debt Settlements vs. Consolidation: Key Differences
So what sets these two options apart? Here are some of the major differences between debt consolidation and debt settlement.
- Amount Owed: Settlement aims to reduce the principal; consolidation aims to restructure it.
- Credit Score Impact: Settlement typically has a more negative impact. Consolidation’s impact varies.
- Interest Rates: Settlement doesn’t focus on interest rates; consolidation often seeks lower rates.
- Creditor interaction: Settlement involves direct negotiation; consolidation replaces the original creditors.
Debt settlement is a better option for those in severe financial hardship, facing bankruptcy, or whose debts outweigh their assets. For those with manageable income, a desire to simplify payments, or better credit, debt consolidation may be a better choice.
No matter which option you choose, Heston Law Firm is here to help you every step of the way. If you are looking for a debt attorney to help with debt consolidation, contact us today.
