Online Financial Tips

Archive for June 30th, 2011

Under debt relief programs there are many options available to a debtor. These include Debt Settlement, Debt Consolidation, Debt Management, Debt or Credit Counseling and Bankruptcy. In a comparison between debt settlement vs. debt consolidation, a consumer may get confused. Both these methods are loan relief programs and present an alternative to bankruptcy.

Now, we will first analyze both the programs in detail and then compare debt settlement vs. debt consolidation.

In settlement:

The consumer needs an overall due of $10k or more. The consumer needs to have the dues consolidated. The consumer needs to hire a professional settlement company. The professional company negotiates with the creditors and threatens the lender that the consumer will have to file for bankruptcy in case the creditor turns down the settlement offer. The creditor never wants bankruptcy and eliminates the debt of the consumer by at least 50%. It depends on the negotiator whether the debt is eliminated by even greater percentage. When the settlement deal is signed, the consumer needs to pay the remaining amount to the lender either as one time payment or in six months installments.

In consolidation:

The debt of the consumer is not eliminated. The rate of interest is reduced on request and some of the costs of the debt are wiped off like, service tax, late fee etc. and the loan is re-amortized. The consumer now pays one monthly payment to the consolidator. The consolidator then distributes the same to the creditors.

Now we compare debt settlement vs. debt consolidation face to face.

In debt settlement you can achieve in eliminating 50% to 70% of total unsecured debt. But in debt consolidation you end up reducing loan burden. Debt settlement takes 1-3 years to complete while loan consolidation may take as long as 5 years. In loan settlement the consumer is not charged by the settlement firm in advance. They charge their clients only when they come up with successful results. While in debt consolidation the firms charge them a nominal fee per month. In settlement the consumer loses both the credit score and credibility but only during the settlement process. In consolidation they are intact.

Have you started receiving credit card debt settlement notices in the mail? Have you been receiving collection calls? If this is the case, you have probably been in debt and been dealing with financial difficulties for quite some time.

Creditors are sometimes willing to settle the account for a lesser amount if the credit card account is seriously delinquent or has been written off. This creditor will usually accept the settled amount in one payment and the payment has to be made within a short period of time.

Now you may wonder why a creditor would settle for less than what is owed. Your credit card issuer is trying to reduce their losses and they have concerns about you paying this debt. Your credit issuer feels that recovering some of their money is better than not getting any of it back. Keep in mind that accepting a settlement may affect your borrowing ability in the future with this creditor, but it is a better option than bankruptcy or doing nothing at all.

A creditor will not usually settle on an account that is current. Normally, the account has to be at least 90 days delinquent before they will talk settlement and many credit card companies will wait longer than that. Here are a few things you should be aware of before agreeing to a settlement.

1. Your settlement payment may not completely satisfy the debt. There is a possibility that the uncollected portion of the debt could be turned over to another collection agency for further collection activity, but this is not the norm.

2. The IRS considers the amount of the debt that has not been satisfied as income. Any amount that exceeds $600 will be report on a 1099, to the IRS, by your creditors. You will be required to pay taxes on this amount.

3. Know what’s on your credit report. If the debt is not on their at all, it is not recommended that you do anything with this debt. If it is showing as being “charged off,” this is negative note on your credit report. If you settle, it will be noted as “settled for a lesser amount” which as also somewhat negative, but not as bad as doing nothing about it at all.

The best thing to do is to try to deal with the original creditor. Communicate with them in writing. If they will not deal with you, contact the collection agency in writing. If at all possible, try to negotiate a repayment plan on the balance. If you decide to settle the debt, get the terms of the settlement in writing to avoid problems on down the road. Once you have paid the debt, ask for a “release of debt” as proof that the company has agreed that the debt has been satisfied.

The best thing that you can do for yourself is to examine the curcumstances that caused your debt to get to this point and to put a plan in place that will prevent you from ending up there again.