Loan Modification Vs. Debt Settlement

by tammy on April 15, 2010

If you or someone you know is considering entering into either a loan modification or debt settlement contract, it is important that the debtor understand the pros and cons of each “solution.” Both are commonly done by those who have found themselves in debt or who are unable to pay off creditors, though sometimes people may not choose the best answer for their particular situation. Deciding which route to go should be a long, well researched, and well considered process that takes into account your lifestyle, the amount of your debt, the amount you can afford to pay, and certain other factors. Understanding the difference between the two possibilities is vital.

Debt settlement is a process that is sometimes referred to as debt arbitration or debt negotiation. In this scenario, the debtor and the creditor agree to a reduction in the overall balance of the debt that will result in the payment being considered paid in full. Usually, this arrangement is negotiated by an outside debt settlement company or a lawyer that is trained to deal in these manners. Many settlement companies do charge large up front or monthly fees, and some creditors report feeling as though the process put them into debt all over again. It is possible, however, to reduce the likelihood of having this type of experience. By carefully researching any company or lawyer one intends to use for the debt settlement, being sure that one can make payments on time or save up the money for the up front fee, and carefully researching other options, debtors can find themselves having a positive experience with the debt settlement process.

Loan modification, on the other hand, is a debt solution that enables borrowers, usually those who have borrowed for a mortgage, to renegotiate the original terms of their loans. This may include lowering the amount of payments, changing how often the payments are due, or changing other key conditions of the loan. In order to qualify for loan modification, borrowers must  provide documented proof of the existence of legitimate financial hardship that is keeping them from meeting the loan’s conditions. As with debt settlement, this process is often done through an outside company or through a lawyer. It may also be worked out with the debtor’s bank or lending institution on a more personal level, though this can be a long and difficult process. With a loan modification, the actual amount due does not change, though borrowers will often have a much longer time to pay the amount off. Again, proper research and the careful consideration of all other options is important to making the right choice and having a successful experience.

Everyone finds themselves in debt at one time or another. This is normal, so debtors should not feel guilty or miserable. Instead, they should simply accept the problem and then work to find the right solution to that problem. Sometimes, simply cutting back on one’s spending or letting go of life’s “little extras” can be a much better solution than either debt settlement or loan modification.

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