When Should You Consider Debt Settlement Over Debt Consolidation?

Managing debt can be a stressful task when you find yourself having several commitments to meet. Two approaches that borrowers often take when handling too much debt are debt settlement and debt consolidation.

Even though both are designed to assist people to take charge of their affairs, they are entirely different concepts. It is important to cast the right amount of understanding on the need to make the right decision between debt consolidation and debt settlement. In this blog we will briefly dive into the features and differences of debt settlement and debt consolidation.

In advance of focusing on when debt settlement must come into play and how, both terms demand definition. Consolidation means borrowing a large sum of money to repay several debts and having one single installments with a lower interest rate. On the other hand, in this aspect of debt management the account holder and the creditor negotiate on the possibility of the sum being owed being settled for a lower amount than what the total balance totals.

When to Choose Debt Settlement

  1. Severe financial distress

Debt settlement can be defined as the process when a person has some problems with payments and is not able to pay for the received credit products. If you are nearly in insolvent status, or your income leaves you with little more than your poverty line along with debts, debt settlement will do.

  1. Significant debt reduction needed

While this can only be used when your debt has got to a point where it is almost impossible to pay back, your creditors can be negotiated with, the advantage is that it allows you to have a big chunk eased off. If you are overloaded with unsecured debts that are in tens of thousands or need significant debt relief, this strategy is useful.

Pros and cons

Debt settlement is one of the most effective ways of dealing with your debts but like everything in this world it is not without weaknesses and shortcomings.

When choosing between debt settlement there are benefits and drawbacks associated with this option as well. The first is that you can pay less than the amount that may be owed, thus can be a good deal saving one a lot of money. However, this process is detrimental to credit ratings since this method often involves not paying the creditors at all, and the accounts’ defaulting will be reported.

Moreover, everyone does not agree to settle and the threat of lawsuits if the credit debt settlement fails. Thus, those factors should be taken into account before engaging in any kind of debt settlement.

Conclusion

Sophisticated debt can be helpful to people who have extreme problems with debts, while consolidation cannot give them enough help. It is most appropriate for people who require a big cut on their overall balance, and who can cope with the credit score drop. Speaking with a financial or debt counselor walk you through the process of deciding if debt settlement is something that should be done in your particular circumstances.

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