Debt Consolidation is the process of combining all of your high interest loans into one single payment with a low interest rate. Debt Settlement is the process of contacting your creditors and working out reduced payments.
Normally I am not a proponent of Debt Settlement because it involves getting out of money that you owe and I think people should pay back what they borrow. However there are some situations where debt settlement is beneficial to both parties.
Consider an individual who loses his health care during a layoff and then has an huge unexpected medical expense. Combined with a mortgage payment and no job, this could easily push his family into bankruptcy. Bankruptcy is generally a no win situation for everyone involved. In a debt settlement scenario all the creditors would be contacted an informed that the individual is trying to avoid bankruptcy. In some circumstances the creditors will be willing to take a reduced payment.
Why would they take a reduced payment? If the individual goes into bankruptcy their is a good chance that the creditor will get nothing. They recognize that getting a 50% of what is owed is better than 0%.
Also if a loan is in default, many places will be turning it over to a collection agency. Collection agencies generally take a large percentage (up to 50%) of the money they collect anyway, so getting 50% of the amount owed is about as good as they can hope for anyway.
For people in dire financial situations a combination of debt settlement to lower the overall debt load and debt consolidation to get the monthly payment for the remaining debt down to a reasonable amount may be a good strategy. Remember, this isn’t a plan for avoiding what you owe. If you are obligated to pay back people then you should do your best to pay them back. Debt Setttlement should be used as a way to help the creditors get some of the money you owe them and to avoid a situation where they would get none of the money owed.
For most people debt settlement isn’t an issue. Simple financial discipline will let them get out of debt. However for people who have had very unfortunate circumstances, debt settlement may provide an alternative to bankruptcy.
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