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Debt Settlement Part 1: The Difference Between Debt Settlement and Debt Consolidation

Seattle Short Sales - Thursday, May 16, 2013

This article is Part 1 of a two-part series on debt settlement. In this article, we look at the differences between debt consolidation and debt settlement. In the second article, we will look at two recent real examples - of clients of ours, whose debts we have settled by convincing their lenders to accept thousands of dollars less than the balances owing.

Many people are confused about the differences between the two strategies known as “debt consolidation” and “debt settlement.”

Debts can add up. Unfortunately, today’s difficult economic climate has many people facing reduced income due to hours cuts or layoffs, and home prices remain low. In these tough times, many Americans find themselves forced to pay basic bills with their credit cards. Their debts are adding up to levels that they may not be able to continue paying.

One way of managing a high debt load is “debt consolidation.” Most people have several different debts, each with a different interest rate. Debt consolidation means managing those debts in order to minimize the interest paid.

For example, if you have $5,000 of credit card debt that you are paying 22% interest on, you are paying over $1000 per year in interest on that debt. If you can move that debt (and any other high-interest debts) into a lower-interest loan, e.g. by paying the credit card off through a line of credit secured against your home, you can bring that interest rate down to perhaps 6%. Those savings, of 16% interest on a $5,000 would save you $800 per year - money that can go directly towards paying off the debt itself, not just servicing the interest.

However, debt consolidation does not relieve you of your obligation to actually pay off that credit card debt. You still owe that $5,000 - and you are still accruing interest on it, even though now it is at a lower rate.

And this is where “debt settlement” comes in. Debt settlement is a completely different strategy. It means making an offer to your creditor, to permanently get rid of your debt. For example, in the case above, you could offer your credit card holder $2,500 to call the debt quits! You would be relieved of having to pay the remaining $2,500, and you would be relieved of that $1,000+ you were paying each year in interest!

Why would your credit card company, or any other creditor, agree to this?

Because it's better than getting nothing.

Debt settlement works with unsecured debts - in other words, debts that do not have collateral associated with them, such as a mortgage on a house or a car loan (where the lender has the right to foreclose on the home, or repossess the car, if you stop repaying them).

Debt settlement also works with undersecured debts, for example a second or third lien against a home. If sale of the home generates only enough funds to pay out the first lien (which, in most cases, is the mortgage loan), then the second or third liens are considered to be undersecured. Since so many homes have dropped in value over the past five years, many second and third liens are now undersecured.

In either case, whether the money owed is unsecured (e.g. credit card debt) or undersecured (e.g. a judgment lien), your creditor has nothing to repossess from you if you do not pay it back. They may be worried that you will declare bankrutpcy - in which case they will receive little or nothing on the money you owe. And that is exactly why they may accept significantly less than the actual amount you owe, in order to “settle your debt.” Because if they don’t, they may get nothing at all.

We have helped numerous clients settle their debts, permanently, often for only 10 to 20% of the total funds owed. In Part 2 of this series, we will look at two real examples - where our clients have been relieved of having to repay thousands of dollars of debt.

Seattle Short Sales has a team of experienced and successful real estate specialists dedicated to working with distressed homeowners. We close, on average, 12% of all short sales per month in King County. In the last 24 months, we have negotiated over 756 short sale approvals, and discounted over $81 million of mortgage debt for distressed homeowners.

In addition to our short sales negotiators, our team includes dedicated professionals advising and advocating for homeowners in the fields of: loan modifications, bankruptcy, debt settlement and collection defense. As part of our service, we offer unlimited attorney and CPA consultations.

If you are a homeowner who is struggling to make ends meet, and would like to learn more about the options available to you, please go to: http://seattleshortsales.com/homeowners/

You can also contact Lambros Politis on Google+ or to find more up to date information on this subject, go to theArk Law Group Blog. 


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