You can use debt consolidation and debt settlement to eliminate and reduce your debt. It is important that you understand the consequences of choosing either of the two options. Before you rush into choosing either of the options it is important that you understand the consequences of choosing either of debt settlement and debt consolidation.

Advantages of Debt Settlement

In debt settlement a part of your debt is wiped out by the lender. This will help in reducing your monthly outgo towards payment of your outstanding. This will make your debt manageable and you will be able to repay your debt conveniently.

By opting for debt settlement you can rebuild your credit and slowly improve your credit score. This will reduce the expanses that you incur on penal charges, late interest fee and other charges associated with delayed payment of the debt.

Disadvantages of Debt Settlement

There are some disadvantages of opting for debt settlement. One of the biggest drawbacks of opting for debt settlement is that debt settlement has a negative impact on your credit score. When you opt for debt settlement it is treated as a foreclosure of loan and your debt scores are significantly affected. Even though your credit score can be improved you need to work hard on it. Another important drawback of debt settlement is that you have to deal with tax implications of such write offs. The IRS will treat debt settlement as a cash gift received or it may add the amount to your income. The rate of tax that you need to pay will depend on the state in which you reside.

As there are advantages and disadvantages of opting for debt settlement, similarly there are advantages and disadvantages of opting for debt consolidation

Advantages of Debt Consolidation

Debt consolidation can prove to be useful for people in financial mess. When you opt for debt consolidation, the company negotiates lower rates of interest with your creditors. It reduces your burden of frequent monthly payment by organizing single monthly payment for all your dues. You don’t have to deal with paperwork as most of your headache is handled by the credit consolidation company.

Disadvantages of Debt Consolidation

The affect of debt consolidation on your credit score is minimal when compared to debt settlement. One disadvantage of opting for debt consolidation is the creditors will not extent you more credit until you clear your old dues by making regular payment. You need to monitor if the debt consolidation company is making the payment on time to your creditors. So ensure that you have enough balance in your bank account to clear your monthly dues.

Choosing the right method

If you ask me there is no one perfect solution to solve your debt problem. Debt settlement can give instant results but will have a negative impact on your credit score. Debt consolidation is a long term process but the effect of debt consolidation on your credit score is minimal. So choose the method when best suits you financial situation.