Debt settlements and debt consolidations are similar, yet different. Settlement reduces the dollar amount of your debt, while consolidation helps reduce the number of creditors you have. Both settlement and consolidation work to make the debt you have easier to deal with, but is either option right for you?

How Do Debt Settlements and Debt Consolidations Work?

With a debt settlement, a credit counselor, or yourself, will get in touch with all of your creditors and try to lower your principle by offering an immediate, lump sum payment. This offers a benefit to the creditor by allowing them to collect a partial, negotiated payment on a debt that would otherwise continue to go uncollected.

With a consolidation, you get a loan to pay off current debts. You will want to look for a debt consolidation loan that has a lower interest rate that the rates you are paying to your creditors. Your financial life may be much simpler by paying one loan rather than several creditors, but just be sure to review the fine print and make sure you are making the best decision.

How Are Settlements and Consolidations Different?

In a settlement, you still owe money to your creditors; you will just own them a lesser amount. In a consolidation, you will no longer owe anything to the original creditors, but the amount you owe is still the same.

With a debt settlement, you will have to contact and deal with an existing creditor, who may or may not accept your settlement offer. A consolidation, on the other hand, does not rely on you consulting with each of your current creditors, so it may be more probable to get things done your way.

A debt settlement will clear out your debt with each creditor, but you have to be able to pay cash for at least part of what you owe. Consolidation will leave you with the debt for a longer amount of time because you have combined it all into one payment. You may also have to put up property or your home as collateral for the consolidation loan. If this is the case and you are unable to make the loan payments, your home or your property will be at risk.

How are Settlements and Consolidations Similar?

Both of these options can save you some money. Settlements can lower the principal, and consolidations can save you interest. Unfortunately, neither one of them can totally erase your debt without your help. You are still partially responsible for paying what you owe.

Is Bankruptcy the Answer?

Bankruptcy can usually wipe out debt completely, unlike settlements or consolidations where you are still responsible for paying.

If you are struggling with debt and don’t know what to do, contacting an attorney maybe your best bet.