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Debt Settlement vs. Debt Consolidation: What’s the Difference?

Many consumers use the terms “debt settlement” and “debt consolidation” interchangeably. While the terms are related and fall under the larger umbrella of debt management strategies, they involve completely different approaches and should be utilized to help consumers at different stages of the debt management process.

Debt Settlement

For most consumers, a debt settlement becomes a viable consideration when the consumer can no longer make the monthly payments (on a credit card, for example) or can only make the minimum payment, which leads to continued growth in the overall amount of the obligation. The consumer or a third-party debt settlement company negotiates with the creditor to settle the outstanding debt for a portion of the overall amount. Below are the key symptoms of a consumer that could qualify for a debt settlement:

  1. At least $7,500 in unsecured debt
  2. Can’t make minimum payments
  3. Finance charges are increasing overall debt amount

Unless some upcoming life event such as an inheritance is going to increase the consumer’s capacity to overcome this debt, then a debt settlement becomes a worthwhile option – it simply doesn’t make sense to continue throwing money into a debt that can’t be paid off.

For more information on debt settlements, visit our debt settlement FAQ as well as our debt settlement articles and discussions. To receive a free initial consultation to determine which type of debt relief option is best for you, simply complete the short form at the top of this page.

Debt Consolidation

Debt consolidation makes sense for any individual that can reduce interest charges by replacing or “consolidating” existing, higher interest rate debt with a lower interest rate loan. Usually, this consumer has the means to pay the debt or will have the ability to pay it down once the consolidation is complete. Therefore, a settlement isn’t required.

Examples of debt consolidation strategies include obtaining a lower interest home equity loan and using the proceeds to pay off higher interest rate credit cards. Balances from higher interest rate credit cards can also be “rolled over” to a lower interest rate credit card in another debt consolidation scenario.

To learn more about which debt relief strategy is right for you, fill out our debt form above for a free initial consultation.

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  • Is Debt Settlement Better Than Bankruptcy for Consumers?
  • Top 10 Ways to Get out of Debt: Debt Settlement Is Just One Option
  • Debt Settlements: Should I Consider Debt Settlement if I Lost My Job?
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