The debts can be so stressful and overwhelming when payments pile up to unbearable proportions. You may just want to pack up and leave. With barely a penny of a dollar left, you may either consider the options of debt modification or debt settlement.

Debt modification is a change in the terms of the loan by a lender to make payment easier. On the other side, debt settlement will reduce the entire debt that one owes. The choice is based on the individual's financial situation and their long-term goals.

This blog on how debt modification and debt settlements work and its pros and cons will help you decide which is optimal for you.

Debt Modification

Debt modification is a situation when a lender would agree to modify the terms of a loan. This does not mean that the debt itself has been forgiven. The terms would be changed to a lower interest rate, longer loan duration, or whatever the lender agrees to. All of these do make your repayment easier.

Several people seek debt modification precisely because they've fallen behind on payments but do not wish to file bankruptcy and lose everything.

How Does Debt Modification Work?

To get the loan modification, you must first call up your loan company and explain your financial situation. Lenders will check your income, expenses, and payment history; then they will make a decision on whether you qualify or not.

Once you have been approved for the loan modification, the lender may:

Lower the interest rate to lower monthly payments.

Extend your loan term in order to spread out payments over a longer time.

Temporarily reduce the payments or defer them until the borrower is back on their feet.

This will help the borrower keep up in payments while they are avoiding foreclosure or repossession.

Pros of Debt Modification

One of the foremost advantages of debt modification is that it eases the monthly payments due to lesser interest accrued. 

Another positive point about debt modification is that it does not damage your credit score in any way. As you continue making the payments on the new terms, your credit remains in good standing.

Debt modification also prevents the foreclosure or repossession process from happening. This can be crucial for homeowners with mortgage or payment problems at the time. 

Cons of Debt Modification

Getting a debt modification is not easy. The entire process of modification may take several weeks or even months.

Another con of any modification is that it may tend to increase the life of the loan. Although this may lower monthly payments temporarily, total interest payments could be higher in the long run.

What Are Debt Settlements?

Debt settlement is a different process from debt modification. It looks to reduce the amount you owe. Rather than changing loan terms, you go back to your creditors and negotiate with them to pay a lump sum that is less than the entire balance.

This option is usually for people who are already behind on payments and cannot afford to repay their full debt.

What Does Debt Settlement Entail

When a debt is settled, you or a debt settlement company enter into negotiations with the creditors and offer a portion of the debt as a single lump sum. Many creditors opt to take settlements instead of risking the loan going into default completely. 

However, before a settlement can be made, borrowers often will stop making payments and save money for the lump-sum offer. Sometimes, this process can take many months or even years.

Pros of Debt Settlement

The primary advantage is that it reduces the total amount of debt. Instead of paying a smaller monthly installment, one can settle their claim and thus receive quicker relief.

Debt settlement may be an option for some and an alternative to bankruptcy with long-sought consequences. By settling your debt, you will avoid court procedures and other legal complications.

For some borrowers, this is the fastest way to debt freedom. After settlement, there can no longer be any claim on the remainder of the debt. 

Disadvantages of the Debt Settlement

Debt settlement does not come without serious drawbacks. The most pronounced of these is the debilitating impact on the credit profile. When the borrower negotiates a settlement, he or she invariably stops payments, leading to the indication of missed payments on the credit report.

Another matter for consideration is that a creditor is not obliged to accept a settlement offer, and some lenders do not oblige even for negotiation.

Then, there are the great fees that debt settlement companies take for their services, which can reduce the amount of savings you get from the settlement. 

Which One for You?

Both debt modification and debt settlement could assist in dealing with financial difficulties, but they serve different purposes and are applicable to different levels of debt.

Modification is the best option possible, provided you can still manage the remittances but want reduced monthly expenses. This saves your credit score and prevents borderline financial consequences.

Settlements are the last calls for those who could not afford to pay back whatever became due. This option would be your reconciliatory panacea if several payments had gone astray.

If you remain undecided between the two options, seek the assistance of a financial adviser who can analyze your situation and help you pick the best solution between any of those two based on your income, debt, nature, and financial objectives.

Final Thoughts

Debt can be overwhelming, but there are a number of options you can use to take control of possible financial problems. Debt modification is to readjust loan terms so as to make payment easier without ruining your credit, while debt settlement is to go for an agreed-on debt sum that is lower. 

The way to select which option is right for you depends on the real concern at your end. If you still have the ability to make any payments, modifying the debt safely can be an option. If you actually cannot afford to remit anything, you want urgent relief and you can carry forth, the settlement might allow it to happen. Regardless of which choice you end up making, early action lets you sidestep bigger financial problems down the road.