Debt settlement vs. debt consolidation

Perhaps the most significant choice you have to make when getting rid of debt is to decide whether debt settlement or debt consolidation is right for you. The main difference is that debt settlement companies negotiate with creditors to help settle your debts for less than you owe. This option is most often used when dealing with a substantial debt owed to a single creditor, but you can also use this option when dealing with multiple creditors.

Debt consolidation is the combining of debts from different creditors and taking out a loan to pay them all in one payment, ideally at a reduced interest rate. For a more in-depth look at the differences, check out our article that explains the pros and cons and differences between debt settlement and debt consolidation.

Unsecured vs. secured debt

There are many misconceptions about which type of debt qualifies for relief. You may have noticed on different company pages we mention the terms “unsecured debt” and “secured debt.” It is important to understand the differences between the types of debt. The type of debt you want to eliminate will influence what company or program you’ll be able to use to become debt free.

Unsecured debt

Unsecured debt is debt not backed by an underlying asset, like your house or property. The most common kinds of unsecured debt include credit card debt, payday loans, and medical bills. Since unsecured debt has no collateral tied to it, creditors can’t take anything that belongs to you. They would have to sue you and obtain a court order before they could seize any of your possessions. Defaulting on an unsecured debt also has a significant impact on a credit score.

Secured debt

Secured debt is any debt backed by an asset. The most common types of secured debt include home loans and car loans. These debts are secured because if you default on your loans, the bank can take possession of your assets, like your car or home. Secured loans are considered less risky because they are tied to an asset, so banks generally don’t lose money. Secured loans tend to have lower interest rates as well.

Student debt

Student debt is technically considered an unsecured loan because it isn’t tied to an asset. For example, a lender can’t take back someone’s education. There are two different types of student loans: private and federal. Private loans are financed by banks, while federal loans are financed by the government. Each type of loan has different qualifications and rates. Student debt relief companies offer refinancing and consolidation for those looking to manage their student debt.

Credit counseling

Another benefit of using a debt management program is the access to credit counselors and education programs to help you identify the causes of your financial troubles. Credit counseling helps consumers understand the behaviors that led them to their current financial situations, so hopefully, they can change those behaviors and live a debt-free life. Most credit counselors provide solutions that you can take with you after completing the program.

Tax debt relief

Tax relief companies help those who either struggle to pay or cannot pay their taxes. These companies help consumers reduce the level of tax debt, stop wage garnishments, and walk customers through audits and reaching tax relief agreements with the IRS.

Debt collectors

While researching the best company to help you become debt free, you may still have to field phone calls from debt collectors. Many collectors try to catch people off guard and unfortunately can take advantage of people by talking fast on the phone. Because of the Fair Debt Collection Practices Act, debt collectors have to send consumers a written notice within five days of making contact. The letter must detail how much is owed, the identity of the creditor, and what measures consumers should pursue if they dispute the notion that they are in arrears. If you receive a call, request that this letter be sent for your review before your next phone call.

Keep a detailed record of all letters and phone calls received from debt collectors. Again, there are certain practices that debt collectors must adhere to and keeping a record of every interaction with the collector will make it easy to see if they are stepping out of line. Debt collectors are not allowed to use foul language, call a place of employment if they have been instructed not to do so, or engage in harassment through repeated calls. For more of our tips about how to deal with debt collectors, please see our blog post on the topic.

Hopefully, this overview has helped you feel empowered to take the next step in choosing the right partner for you to help you on your journey to financial freedom. Check out our expert reviews of the top-ranked debt settlement companies, debt consolidation companies, and tax debt relief companies.