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Debt Consolidation And Debt Settlement:
Are There Any Differences? |
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| The differences between debt consolidation and debt settlement are an issue that needs some clarification. Due to the frequent use of these words as synonyms, there are misunderstandings that can lead people into selecting wrong financial solutions to their debt problems or at least, waste a lot of time searching for a solution in places where they won’t find it. |
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| If used correctly debt consolidation and debt settlement are two separate concepts that have few things in common. Both seek debt relief but the means they employ are somewhat different. And since some definitions are in order, we will start with debt consolidation: |
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Debt Consolidation
Debt consolidation is a debt relief method that consists on administrating in a smarter way debt by resorting to a financial institution that takes care of organizing the multiple debt payments and negotiating with creditors debt reductions and terms modifications in exchange of a single, lower and more affordable monthly payment that lumps together all the different debt payments in one. |
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| The above is a clear definition of debt consolidation. Sometimes, the debtor has to take a consolidation loan with the financial institution and the money obtained from the loan is used to repay the total or part of the debtor’s outstanding debt (the one that is not negotiable). This is the reason why debt consolidation is sometimes confused with debt consolidation loans, too. Truth is that debt consolidation is the purpose of those loans and it’s a concept independent to them. |
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Debt Settlement
The situation gets more complicated when trying to explain what debt settlement is. The correct use of the concept of debt settlement is still discussed. However, most will agree that to be purist implies associating the concept of debt settlement with the intervention of expert negotiators that are most commonly lawyers with proficiency on debt negotiation, foreclosure, bankruptcy and all the legal processes associated with the execution of debt guarantees. |
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| This doesn’t imply that debt settlement has necessarily have to do with a court process. Actually, debt settlement often occurs outside the court and then, the agreement between the parties (debtor and creditors) is validated by a judge or a private arbiter. However, debt settlement is occasionally indeed part of a legal and litigious court process. |
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| Unfortunately, the common, widespread and ordinary use of these terms has lead to believe that these concepts are synonyms and that there is little or no difference between them. On many articles and both offline and online knowledge bases you’ll find them used indistinctively. However, with this modest clarification, you’ll be able to notice and discern when they are used as synonyms and when they are used as separate notions. |
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