1. You Save Money.
It’s true using debt settlement as a means to get out of debt saves you tons of cash in interest and fees. Not only that, but by settling a debt you are actually being forgiven for a portion of your debt.
Bottom ine is that you will end up paying your creditors less than you originally owed them. Not so with debt consolidation, as you will still be paying you full credit card balance and losts of interest to boot. I was going to title this point You Save More Money, but that implies that you save money with debt consolidation, which is not really true.
2. You Get out of Debt Faster.
This is kind of a no-brainer. If you start out owing a creditor $10,000, you settle your debt with them for $5,000, then you end up only having to pay $5,000. And using the same brilliant math, you can pay off $5,000 faster than you can $10,000.
3. You are in Charge.
That’s right. It may seem that since you owe the credit card company thousands of dollars, that they are in the driver’s seat. But in reality, since the debt is unsecured, they can’t do a thing to you. Yea, I know they can sue you, but generally, that’s only if you are completely unresponsive to their demands for payment. Which of course, you won’t be because you’re looking for a settlement and working with them along the way.
In addition, the credit card companies are usually reluctant to sue because the fact is they will end up paying more for attorney time and court cost than you owe them in the first place. They want to get at least a little green from you and they know that you’ll probably declare bankruptcy if they slap a lawsuit on you.
4. You’re not a Slave.
Guess what? Most debt consolidation companies are owned by groups of credit card companies. Surprised? When you hear a TV or radio commercial for a non-profit debt consolidation company claiming to “work with hundreds of creditors to help you get your financial life back in order”, it’s true. Most, not all, are funded by these credit card industry organizations.
So the main objective of the debt consolidation companies is to keep you financially alive enough to keep you paying your bill to them. Can you say, “Slave”?
5. Your Credit Score Bounces Back Faster.
This truth may be a bit of a shocker to those of you choosing debt consolidation to protect your credit score. While it’s true that your credit score will suffer a good amount by settling your debt, it will come back faster because your debt will have been cleared. If you take out a debt consolidation loan, or enter a debt management program, you still have a high debt-to-credit ratio well into your program. It will take you years to get the balance down to a reasonable level where your credit score will start to grow back.
For example, if you owe $10,000 to a creditor and you settle for $4,000, you can pay off that $4,000 within a year easily. After a year, your credit report shows no balance and a note on the account, “Settled for Less than Full Balance”. If you owe that same $10,000 and choose debt consolidation, a year later your balance will be still over $6,000.
Believe it or not, your credit score will be higher with the zero balance and the note on your account, simply because your debt is gone.
Note: I’m simplifying a lot in this article, but the basic points are true. However, there do exist situations in which debt consolidation may be an appropriate choice.
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There really is no good answer to this problem. If we are honest with ourselves, usually the problem is people spending money they shouldn’t be in the first place. If we just had some dang restraint!
I agree Bruce, the root of the most people’s debt problems is overspending. But some people get hit with debt by no fault of their own, ie. medical bills, failed business, lost jobs, etc.
While there’s no good answer, some answers are better than others.
We have entered into debt management and we are paying back all the principal we owed on our credit card debt, just not all the interest. We cannot use our credit cards and our rates have been drastically cut. We should be out of debt in 4 1/2 years well beyond what we would have been had we continued making minimum payments. We had some medical debt, but mostly just living beyond our means. We are struggling and learning to say no. Our debt management program has been a real lifesaver for us.