The Difference between Debt Consolidation and Debt Settlement

“Debt is the worst poverty.” — Thomas Fuller

Got Debt? In this day and age, many people have consumer debt and typically this means credit card debt. Peter Berkery at PlanetOut Money writes, “Credit cards are evil. You should never carry a balance on them.” This tip is found in an article appropriately titled, Satan in Your Wallet.

He continues, “Credit cards are designed to keep you in debt forever. If you made only the minimum payment required by most credit card companies, it would take you 20 years to pay off your total balance! In the process, the company will make thousands of dollars from the exorbitant interest rates it charges you.”

If you already have a balance on your credit cards, you need to eliminate it immediately. Stop using any cards on which you’re carrying a balance. Cut them up and throw them away. You’ve proven you cannot handle them, so you should not keep them. Pay by cash or check only.”

But even after Satan has been banished from your wallet, sins can haunt you. Berkery offers a few ways to handle a consumer debt crisis:

1. Switch your balances to a credit card with a lower interest rate, if possible.

2. Add a second job.

3. Contact the credit card companies to see if it is possible to work out an extended repayment schedule.

4. Consider borrowing against other assets (retirement plans, life insurance, brokerage accounts, certificates of deposit) to pay off your credit cards.

5. Sell assets.

If those don’t work, then here are two options: debt consolidation or debt settlement. What’s the difference?

Mike Schiano, also known as the DebtBuster, provides this explanation. He writes, “During the past few years of low mortgage rates, the term ‘debt consolidation’ has been used heavily by companies marketing home equity loans to help consumers consolidate their debt. The term has been used in the credit counseling industry and by a wider range of financial services companies.”

“Debt consolidation simply means making one monthly payment instead of paying several different creditors each month. To accomplish this, the consumer would transfer the debt from the multiple accounts to a single account, such as a home equity loan or line of credit.”

“Similar to debt consolidation, a debt management program offers the consumer the ability to make one payment to the counseling company, which then makes the payments to the various creditors. Strictly speaking, the debt is not really consolidated. But for the consumer, managing debt becomes easier.”

“More importantly, these credit counseling agencies may offer other benefits to the debtor, such as negotiating lower monthly payments and interest rates to enhance the ability to catch up on overdue payments. Before enrolling in a debt management program, most reputable agencies will require the consumer to participate in a budget and counseling session to ensure that such a program is the best solution.”

Debt Shield, a company providing debt settlement services explains, “Debt settlement is the process of negotiating with creditors to settle for less than owed. Successful negotiations with creditors require a legitimate financial hardship (loss of job, medical problems, divorce etc). Instead of paying back the full debt amount, you’ll probably end up paying only 35-50 percent of what you currently owe.”

I’m not pushing debt settlement just because Debt Shield is one of our sponsors here at Queercents. Rather, take notes from Jenny McCune at Bankrate.com and learn that most financial experts favor debt settlement because it costs less and is quicker than a debt-consolidation loan.

Just do whatever it takes get out of debt and free your wallet or purse or whatever you happen to be carrying these days from the reins of Satan.