Debt Consolidation vs. Debt Settlements

While they use very similar terms and are both a means of alleviating your debts, there are many major differences between debt consolidation and debt settlement programs.
Debt Settlements: A debt settlement program negotiates the balance due with your creditors in an attempt to have the consumer payback less than what was originally owed. Immediately this sounds ideal to any consumer struggling with their debts and monthly payments, but the cost to ones pocket and credit may not be worth the small savings to come. A settlement company requires monthly payments from their clients for 8 months to 1.5 years but does not send payments to the creditors each month. Instead, payments are held in an effort to create a large sum to negotiate the balance being paid in full for a smaller amount, usually 40-50% less. Like working with your creditors direct, if you're not making consecutive monthly payments your credit can be tarnished with late marks and further fees incur on a monthly basis, raising the balance due and further damaging your FICO credit score. Furthermore, creditors are not willing to negotiate the balances down until an account is in a ‘charged off' status. It usually takes 6 months of non-payment before a creditor will ‘charge off' an account. That's 6 months of added fees, negative reporting to the credit bureau, and harassing collection calls. Whether the debt is paid in full or partial, charged off accounts reflect negatively for 7 years on your credit report and multiple charge off accounts could reflect more poorly than a bankruptcy or repossession. In addition, the IRS takes their cut for the charge off loss by the creditor. Say you owe $10,000 to a Visa and a settlement company negotiates the payoff to $5,000. The following year you'll be sent a 1099 tax form to claim the difference of the amount settled. The $5k difference is then considered taxable income by the IRS, so depending on your effective tax rate, you may have $500-$1,000 additional tax burden for the year your account is settled in.
Debt Consolidation: A consolidation program negotiates the creditor terms to achieve reduced interest rates and the stopping of late, past due, and over limit fees. The monthly payment is usually reduced as well and most creditors will bring past due accounts to a current status after 3-6 months of consecutive payments, helping improve your credit score over time. Like settlements, payments are required consecutively each month. However, in a consolidation program payments are SENT each month as they are received by the client. This ensures the accounts do not fall behind and the new terms remain in place until the debt is paid in full. The balance owed is paid down on a monthly basis at reduced rates, allowing more of the client's monthly payment to go towards the balance due rather than creditor fees and finance charges. Consolidation programs cannot exceed 60 months and depend on the amount of debt owed and the terms per creditor enrolled in the debt consolidation program. There are usually no additional fees for making extra payments or paying off the debt earlier than the time quoted. The consensus is, the faster the client is paid off the better for all parties as most agencies work off a referral basis from satisfied customers.
If the agency's' fees are unreasonable chances are your financial well being is not their primary concern. A nonprofit agency will usually charge in accordance with your state's guidelines and offer a low monthly service fee to cover in house expenses. In either instance you'll want to do your homework before signing with an agency. A nonprofit agency is the best option followed by a review of the company's Better Business Bureau profile and rating. http://www.bbb.org/.
If you're looking for credit card relief and an alternative debt solution that won't hurt your credit, please contact a certified credit counselor for a free budget analysis to see what options are available to help you become debt free. http://www.freedomdm.org or call, 800.801.1563.